SPK- Spark NZ (TELCO)

[Snoopy]

Again I have gone back 18 months to answer this post, because it has been bothering me how all those highly paid accounting types at Spark HQ -apparently- stuffed up big time by letting their imputation credit balance go negative. Again this post it talking about FY2021.



Hi Snoopy

I did a bit of a dive into the Spark tax numbers. Keep in mind that IC's are deducted from the ICA when they are paid, not declared so the recent final dividend will not appear in the ICA until the interim report next year (being FY22H1).


I have modified Ferg's words of wisdom above by adding a qualification in brackets:
"Keep in mind that IC's are deducted from the ICA when they are paid, not declared (but even then deducted only when the tax is due)."



Rather than being funny business with tax, I view the amount payable as being real (ie Spark owes $23m) and that for whatever reason they went OD on the ICA account.

Either someone miscalculated the available IC's or there was an unknown tax receipt/refund** that put a spanner in the works. Notice the prior year AR had $1m tax receivable but the latest AR has $0 tax receivable and does not show any tax receipts - I suspect any such receipts have been netted off against the payments made so we do not have 100% visibility. I am curious as to what penalties they will cop for the negative ICA balance.

**Maybe the ICA was good when the dividend was declared but there was a tax receipt/refund between the payment date and year end. Or a combination of all 3.....receipt + stuff up + non-NZ payments.


Ferg, your possible explanations for the negative ICA balance have credence. In particular, I am thinking about the reinstatement of depreciation on commercial buildings, as part of the Covid-19 response. The reintroduction of such a depreciation allowance was made for the 2020-2021 financial year. That meant future declared profit for any business that owned commercial premises would now be lower than expected, before the reintroduction of this depreciation allowance. If a company was using the provisional tax system, where tax due was based on the previous years profits, then this could result in a company paying too much tax over the IRD tax year ending 31st March 2021. That seems to me to be the most likely source of an 'unexpected refund' for Spark. Because although Spark do not own office towers, they do own exchange buildings (and until recently cellphone towers) scattered around the country.

However, as explained in my post 2000, I think there is a simpler explanation. The negative imputation credit balance as set out in AR2021 from an IRD perspective, did not exist, never existed, and is merely an accounting reporting construct. It only exists from a Spark perspective, because Spark have chosen to pay a dividend in April, which is in FY2021, as defined by Spark (FYE 30/06/2021), whereas from an IRD perspective, this same dividend was paid in FY2022 (FYE 31/03/2022), Thus the dividend was paid (April 2021) before the tax bill on the earnings used to pay that dividend was due (probably August 2021). And to account for a tax bill yet to be paid but not due, phantom 'negative imputation credits' were booked by Spark. This is all resulting from the downstream consequences of the mismatch of financial year ends, where Spark sees their financial year ending on one date, whereas IRD sees the year of that April dividend payment ending nine months later.

SNOOPY

[Snoopy]

This is a comparison between 3 methods of measuring net profit after tax. The first one, most quoted in the glossy Spark presentations is 'Net Profit After Tax'. This is recorded in this table below under the monicker 'Net earnings'. This is how the 'often highlighted in presentations' NPAT is described in Spark's 'Statement of Profit and Loss and Other Comprehensive Income'.

Nevertheless in any year, there are often transactions or expenses that are 'one offs', that take away from the general picture of how the core of the business is doing. As an investor, I look for repeatable results. So I like to look through these 'one offs', so that I can get a better understanding of long term earnings trends. To enable me to do this, I calculate something I call 'normalised earnings', which is the second NPAT measure that I have tabulated.

The third NPAT measure is called 'Total Comprehensive Income'. This income measure takes 'Net Earnings' but further incorporates changes in values of hedge contracts based around currency swaps and interest rates swaps. Spark is partly financed by overseas capital, which is borrowed at overseas interest rates over period(s) of several years. Hedging contracts can provide certainty of NZ dollar denominated interest payments while these loans are outstanding, and certainty on the NZ dollar capital repayment that will ultimately be required to pay back loan capital at the end of each overseas loan term. Nonetheless, 'annual reporting' is required to reflect fair market values of these contracts should they be suddenly and prematurely cancelled. These annual adjustments are required to be incorporated in annual profit figures by NZ accounting standards, despite there being no plans by Spark to terminate these arrangements early. Typically these annual adjustments are volatile in size and may be positive or negative. This is why TCI is a more volatile measure of net profit than the other two methods I have described. To further add to the volatility, equity investments by Spark, as measured by a change in market value of such investments over a year, are also incorporated into the TCI profit calculation.



Year
Normalised NPAT
Total Comprehensive Income (TCI)
Shares EOFY
Normalised eps
Net Earnings ps
TCI ps
dps (tax paid)
EOFY NTA
4/ Gross dividend payments I have calculated in post 1968. After tax dividend fgures are the respective gross numbers

FY2018:
($365m - 0.72($10m) ) = $358m
$357m
1835m
19.5cps
19.9cps
19.5cps
24.0cps
84.0cps


FY2019:
($409m - 0.72($15m) ) = $398m
$437m
1836m
21.7cps
22.3cps
23.8cps
23.3cps
79.8cps


FY2020:
($427m - 0.72($35m-$2m) - $10m -$7m) = $386m
$483m
1837m
21.0cps
23.2cps
26.3cps
23.3cps
81.3cps


FY2021:
($384m - 0.72($28m - $16m) ) = $375m
l$354m
1867m
20.1cps
20.6cps
19.0cps
25.0cps
80.5cpsone


FY2022:
($410m - 0.72($26m) ) = $397m
$427m
1872m
20.9cps
21.2cps
22.8cps
25.0cps
78.8cps





Total



103.2cps
107.2cps4/ Gross dividend payments I have calculated in post 1968. After tax dividend fgures are the respective gross numbers
113.4cps
120.6cps




Notes

1/ Normalised earnings = Net Earnings (+/-) One off Adjustments. Normalisation details are in post 1994.

2/ eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)

3/ Dividend payments recorded are those paid during the financial year in question (not dividends declared in that financial year).

4/ Gross dividend payments I have calculated in post 1968. After tax dividend figures are the respective gross numbers multiplied by 0.72.

--------------------------

Looking at this 'five year picture', overall it is TCI NPAT that in total best correlates with dividend payments. This is slightly worrying to me, as it could indicate that dividend payments are being partially funded by one off revaluations and temporarily favourable movements in hedging contracts. It is in the nature of these hedging contracts that 'what goes up must come down' as each hedging contract runs its course. So using any such positive changes to fund dividends is not sustainable.

Another way to boost dividend payouts to shareholders -ahead of money earned-, is to pay out some company capital to shareholders to bolster their dividends. There is some evidence this is happening. The company's share capital has reduced by 5.2cps over the five years we are examining. That 5.2c makes up most of the difference between dividends paid out over that period and TCI NPAT over the same time-frame. However, shareholder capital does not contain imputation credits. So this does not explain how Spark can pay fully imputed dividends at a higher rate than its underlying earnings, no matter which of the three measures of NPAT earnings you choose to use. More investigation is required to see just what is going on here.

SNOOPY

[Snoopy]

This does not explain how Spark can pay fully imputed dividends at a higher rate than its underlying earnings, no matter which of the three measures of NPAT earnings you choose to use. More investigation is required to see just what is going on here.


My snout is out! I am going full detective mode into sniffing out where Spark's imputation credits have come from. Like any good detective case, we have to start from what we know 'for sure', and work from there. What we do know is that:

1/ A company can only gain NZ imputation credits by paying NZ income tax to the NZ government IRD.
2/ As at 30th June 2020, Spark's imputation credit balance was $0m. (AR2020 p94). IOW imputation credits were exhausted on that date.

So.......if we add up the tax paid from the cashflow statements subsequent to the EOFY2020 balance date, that will give us the maximum imputation available to Spark since. I am going to stick to a two year time frame, as that is the information that we have fully documented via the FY2020 and FY2021 annual reports.




NZ Imputation Credits Available FY2021-FY2022
Income Tax Paid
Imputation Credits Available
Reference


FY2021$188m(AR2021 p65)


Tax Effects of Non-NZ Profits FY2021($6m)(AR2021 p100)


Taxes Paid in Foreign jurisdictions FY2021($6m)(AR2021 p100)


FY2022$160m(AR2022 p82)


Tax Effects of Non-NZ Profits FY2022($7m)(AR2022 p119)


Total
$329m
$329m







NZ Imputation Credits Paid Our FY2021-FY2022
Dividend Paid
Imputation Credit Attached
Reference



FY2021 Previous Year Second half year dividend
$230m
$89.4m
(AR2021 p91)


FY2021 First half dividend
$231m
$89.8m
(AR2021 p91)


FY2022 Previous Year Second half year dividend
$233m
$90.6m
(AR2022 p110)


FY2022 First half dividend
$234m
$91.0m
(AR2022 p110)


Total

$360.8m




Imputation Credits Paid calculations

1/ 0.3888 is the number you apply to the declared dividend to get the IC's where they are fully imputed (.3888 = .28/.72)

-----------------------------


So to summarise using 'the jewellery theft analogy':

1/ On the evening of 30-06-2020, 'the safe was empty'.
2/ Over the year $329m of jewels were put into the safe.
3/ Over the year $361m of jewels were taken out of the safe.

This is all on a cashflow basis remember.

How is this possible? Unless some of those jewels taken out were counterfeit? Any real detectives out there able to solve this mystery?

SNOOPY

[nztx]

My snout is out! I am going full detective mode into sniffing out where Spark's imputation credits have come from. Like any good detective case, we have to start from what we know 'for sure', and work from there. What we do know is that:

1/ A company can only gain NZ imputation credits by paying NZ income tax to the NZ government IRD.
2/ As at 30th June 2020, Spark's imputation credit balance was $0m. (AR2020 p94). IOW imputation credits were exhausted on that date.

So.......if we add up the tax paid from the cashflow statements subsequent to the EOFY2020 balance date, that will give us the maximum imputation available to Spark since. I am going to stick to a two year time frame, as that is the information that we have fully documented via the FY2020 and FY2021 annual reports.



NZ Imputation Credits Available FY2021-FY2022Income Tax PaidReference


FY2021$188m(AR2021 p65)


Tax Effects of Non-NZ Profits FY2021($6m)(AR2021 p100)


Taxes Paid in Foreign jurisdictions FY2021($6m)(AR2021 p100)


FY2022$160m(AR2022 p82)



Tax Effects of Non-NZ Profits FY2022($7m)(AR2022 p119)



Total$329m



Notes

1/


It might all be in timing of dividends payment - Snoopy

The IRD Imputation year end is 31 March each year

Spark distribute dividends in April & Oct each year

The following is excerpt from a note in the 2022 AR (page 122) -


Spark has a negative 16 million imputation credit account balance as at 30 June 2022 due to the timing of dividend and tax payments (30 June 2021: negative 18 million). The imputation credit account had a positive balance as at 31 March 2022 and 31 March 2021.

Any negative ICA credits from April forwards only need to be made up on/by 31 March IRD Imputation account year end - the next year

From Jun 2020 to 31 March 2022 there were only 3 distributions Oct 20, Mar 21 & Oct 21
(3 x 4.861cps ICA credits)

The final div payment always doglegs it over into the next Spark financial year - past Y/e 30 Jun balance with the Oct payment

Effectively both distributions say for 2022 Spark year only need to require SPK to find / pay enough to cover allocated imputation credits finally by 31 March 2023 - in the year following

Of course they may pay Prov Tax or buy tax credits to achieve full ICA coverage position at 31 March
or credit position, which they are reporting in the 2022 AR


The "negative 16 million imputation credit account balance as at 30 June 2022" is after payment of
the 8.4.22 Interim 2022 dividend, so it looks like tax was paid or tax credits purchased in Jun 2022
Quarter, if the undisclosed Mar 31 2022 balance was insufficiently in credit to carry full imputed Apr 22 Div.

[Snoopy]

It might all be in timing of dividends payment - Snoopy

The IRD Imputation year end is 31 March each year. Spark distribute dividends in April & Oct each year

The following is excerpt from a note in the 2022 AR (page 120) -
"Spark has a negative 16 million imputation credit account balance as at 30 June 2022 due to the timing of dividend and tax payments (30 June 2021: negative 18 million). The imputation credit account had a positive balance as at 31 March 2022 and 31 March 2021."

Any negative ICA credits from April forwards only need to be made up on/by 31 March IRD Imputation account year end - the next year

From Jun 2020 to 31 March 2022 there were only 3 distributions Oct 20, Mar 21 & Oct 21
(3 x 4.861cps ICA credits)

Effectively both distributions say for 2022 Spark year only need to require SPK to find / pay enough to cover allocated imputation credits finally by 31 March 2023 - in the year following


Or in dollar terms:
$89.4m+$89.8m+$90.6m = $269.8m was the tax money Spark needed to pay to IRD by 30-03-2022, and they did that. In fact the cashflow statement(s) shows that a total of $329m in tax was paid over the two year period ending 30-06-2022. $329m > $269.8m, so the required tax payments are well covered.

As you say, the fourth tax payment of $91.0m covering the dividend paid in April 2022 may not have been due to the IRD until March 2023, due to the mismatch of Spark's tax year with IRD's tax year.

We can debate exactly when this final tax payment might be due. But there is no doubt that eventually this tax bill would have to be paid.

$360.8m - $329m = $31.9m is the shortfall of tax that must be paid to allow for four half years of fully imputed dividends between 01-07-2020 and 30-06-2022.



The "negative 16 million imputation credit account balance as at 30 June 2022" is after payment of the 8.4.22 Interim 2022 dividend, so it looks like tax was paid or tax credits purchased in Jun 2022 Quarter, if the undisclosed Mar 31 2022 balance was insufficiently in credit to carry full imputed Apr 22 Div.


If we look at AR2022 p120 (which you have quoted above) the negative imputation credit was $16m at balance date. That is not enough to cover the shortfall of $31.9m. So something tricky looks to be happening here, which you have recognised in the part of your quote above that I have highlighted in bold.



Of course they may pay Prov Tax or buy tax credits to achieve full ICA coverage position at 31 March or credit position, which they are reporting in the 2022 AR


Yes they may have paid some provisional tax for their FY2023 income (IRD income year for Spark being 01-03-2022 to 01-03-2023) that reduced the negative imputation credit balance down to $16m as at 30-06-2022. But how can paying future tax to cover tax paid on an historical dividend be sustainable? Maybe it might work as a one off. But it looks like Spark are paying out more imputation credits that they earn every dividend, as a matter of policy. If your underlying earnings are not growing each year, and I can mount an argument that at Spark (see normalised earnings in post 2002) they are not, how is such a tax payment policy sustainable?

One interpretation of my post 2002 is that since 01-07-2021, Spark are using their existing (and declining) asset base to 'pay income tax' (sic) on phantom earnings that they never had, to maintain an illusion of what is in reality a 'topped up 12.5cps' fully imputed dividend from 'earnings' that were never earned. Or in the terms you put it, that are rather less incriminating "buying tax credits to achieve full ICA coverage position". Either way you frame it, how can Spark keep doing this?

SNOOPY

[nztx]

Or in dollar terms:
$89.4m+$89.8m+$90.6m = $269.8m was the tax money Spark needed to pay to IRD by 30-03-2022, and they did that. In fact the cashflow statement(s) shows that a total of $329m in tax was paid over the two year period ending 30-06-2022. $329m > $269.8m, so the required tax payments are well covered.

As you say, the fourth tax payment of $91.0m covering the dividend paid in April 2022 may not have been due to the IRD until March 2023, due to the mismatch of Spark's tax year with IRD's tax year.

We can debate exactly when this final tax payment might be due. But there is no doubt that eventually this tax bill would have to be paid.

$360.8m - $329m = $31.9m is the shortfall of tax that must be paid to allow for four half years of fully imputed dividends between 01-07-2020 and 30-06-2022.



If we look at AR2022 p120 (which you have quoted above) the negative imputation credit was $16m at balance date. That is not enough to cover the shortfall of $31.9m. So something tricky looks to be happening here, which you have recognised in the part of your quote above that I have highlighted in bold.



Yes they may have paid some provisional tax for their FY2023 income (IRD income year for Spark being 01-03-2022 to 01-03-2023) that reduced the negative imputation credit balance down to $16m as at 30-06-2022. But how can paying future tax to cover tax paid on an historical dividend be sustainable? Maybe it might work as a one off. But it looks like Spark are paying out more imputation credits that they earn every dividend, as a matter of policy. If your underlying earnings are not growing each year, and I can mount an argument that at Spark (see normalised earnings in post 2002) they are not, how is such a tax payment policy sustainable?

One interpretation of my post 2002 is that since 01-07-2021, Spark are using their existing (and declining) asset base to 'pay income tax' (sic) on phantom earnings that they never had, to maintain an illusion of what is in reality a 'topped up 12.5cps' fully imputed dividend from 'earnings' that were never earned. Or in the terms you put it, that are rather less incriminating "buying tax credits to achieve full ICA coverage position". Either way you frame it, how can Spark keep doing this?

SNOOPY


How about untaxed gains sitting in Spark Reserves, if there are some ?

No tax credits from tax paid for those - probably necessitates a bit of add to
to avoid messy part imputed exercises ..

The Tax buying exercises from Tax Pool in some circumstances may not only
cover the full previous year depending on when done, but could also extend
to covering earlier period's shortfalls or adjustments to tax due I would suspect ..

[Snoopy]

Time only will tell if this proves to be a spark or a fizzle.

Best Wishes
Paper Tiger


I did my annual reconciliation on my NZ share portfolio last night, based on that 31st March tax year. The likes of the Waltzingironman would be horrified to learn I accomplished this using the good old pen and paper. But I prefer it this way, because if I had automated the whole process, I am sure that I wouldn't be able to resist firing up the computer and looking at it far too often.

I was rather horrified at how many losers I had harboured in my NZX portfolio over 2022-2023. Only four of my twelve outperformed my comparative 'fixed interest index', those being (in order of ascendance)" PGG Wrightson, Mercury Energy, Spark and Chorus. In truth I only have a small holding in Chorus. So it was Spark that did the heavy lifting on my positive return team of four.

Spark and I go back a long way, well before it was Spark in fact. I remember all those years ago scrambling some cash to get a minimum holding together (this was well before the days of Sharesies too). And in all the years since I have never -willingly- sold any ( I think there were a couple of capital returns where some of my shares got cancelled along the way, and some 'Telecom' cash ended back in my account.)

If I take the number of shares I hold and divide by two, then I can look back and see the time and date I held that number of shares. This gives me a 'median share holding time', in the case of Spark, of August 2007. If my maths is correct that was 16 years ago. The price of Telecom shares as they were then (back in the day) was $4.49. So about 50c per share capital gain in 16 years is my lot? Well, I was also getting a pretty decent yield all that time. And my records show an average acquisition price over my entire period of ownership of $3.56. So I must have done some judicious selling somewhere along the way to get my average purchase price down to that level.

Hang on, didn't I just open my story on Spark with the declaration that I had never sold any? Yes that is strictly true. But I did back out my Chorus shareholding at the price it was quoted on the first day of trading, when that shareholding 'split' from my Spark (or Telecom as it was then) holding. I think that is the right way of treating what happened. Because I never paid a cent for any of my Chorus shares.

Well before this (early 2000s?) I had set up Telecom to be the star of my portfolio, as Telecom became the roadway, over which the Dot Com craze and the internet would furnish my road to riches. I didn't really understand all the Dot Com businesses at the time. I did have enough nous though, to figure out that all the methods and assumptions that went into measuring the values of those new dot com businesses were crazy. So I didn't invest in any of them, joining the likes of Warren Buffett who was widely pilloried at being past his prime, not understanding the new way to do business, and labelled a fuddy duddy 'has been' investor. When the Dot Com bust came, all of those 'its different this time' 'once in a lifetime reset' investors were themselves reset by having their share portfolios and bank accounts reset to zero (or less).

With the piggy backers gone, my road to riches dream that I had rolled out by investing in Telecom sputtered. We were back to the boring days of investing in land lines and mobiles and that dial up screech that was the internet of the day. The saving grace was that everyone did seem to need a telecommunications line of some kind. So even though my road to riches dream was shattered, I was getting a steady income from my Telecom shares.

At that point we had the smartest woman in New Zealand running the show at Telecom, one Theresa Gattung. She had the government of the day so far twisted around her little finger that Telecom was going to milk those monopoly network profits AND be the leading retailer to boot, using customer confusion to boost profits. So great were those potential profits, that Telecom would end up being valued at around 25% of the value of the entire listed NZX. Except the leader of that government was one Helen Clark. And Theresa was about to find out that actually she was only the second smartest woman in the country. The unravelling of Chorus from what was then spoken of as 'New Telecom' had begun.

This brings us to 2011. My spun off Chorus shares went into the bottom drawer, because I didn't know how to value the coming fibre broadband network that would result from the Chorus build out plan. Yet I did understand the potential treasure that any monopoly business might become. So better to hold on rather than throw away. Meanwhile my Telecom, soon to be Spark, shares slowly declined to flat-lined. I managed to pick up a few more Telecom/Spark shares in the ensuing decade, and had the patience to pick them up when they were out of favour, simply because they were out of fashion. This means, overall, I have no reason to complain about my Spark investment. Even during those Covid lock-downs, while other shares' dividends faltered, Spark was always there to pay the bills. So Spark and I have ended up in a 'love in the end' relationship rather than a 'love at first sight' one.

Did I just use the four letter 'L' word then? What was that someone said about 'never falling in love with your shares'? With all my shares, love must be earned. And that means seeing how my chosen share in any industry stacks up against the opposition. Telstra, and British Telecom are the two 'like market' measuring sticks I am most familiar with. Over the years, I feel Spark has taught both of these companies a lesson, in how to transform what was a natural monopoly into a thriving 21st century competitive retail business.

To end my retrospective on a boring note, I intend to hold my Spark shares for the foreseeable future. And the steadying influence my Spark shares had on my portfolio over a tumultuous 2022/2023 is a very good reason for doing that!

I hope you enjoyed this little bedtime tale, and hope it helps you fizzle away into sweet dreams. Good night everyone (and big cats everywhere)!

SNOOPY

[Ricky-bobby]

https://announcements.nzx.com/detail/409498 Looks like they are moving more towards data centres?… good move as I see Vodafone dominating with new starlink partnership. 100% cell phone coverage, will be a game changer.

[Snoopy]

https://announcements.nzx.com/detail/409498 Looks like they are moving more towards data centres?




Public cloud = customers, business rent their own servers and services from providers like Amazon AWS, Microsoft Azure

Private cloud = Spark run their own data center and rent out physical or virtual servers and services to customers - basically the same thing at AWS/Azure offer, however "private" as you typically have a private, secure connection from your office to the provider, rather than being accessible via the public internet. Caveat, you can have the same thing from a public provider too by adding a "private secure connection" component for an extra fee.

Generally hard to compete with the big boys on price, so unless customers have high security/data sovereignty requirements (e.g. must be held/hosted within new zealand) you're fighting a losing battle.

The way I read it is that spark are losing customers to Azure/AWS because they will be cheaper, and both are also opening data centers within NZ in the next wee while (Microsoft are saying they will be open in NZ by 2024).


"We are focused on accelerating simplification across our business portfolio and maximising our competitiveness in hybrid cloud, which is showing strong demand as customers seek diversification and a transition path to public cloud services.”"

This part sounds a bit optimistic to me, trying to offset the bad news they are losing share to public cloud providers.

Funnily enough, Amazon don't seem to be too worried about 'private cloud providers' like Spark. In fact it doesn't sound like they acknowledge that 'private cloud providers' will even exist in the future.

---------------------------

https://www.enterpriseai.news/2014/11/14/rare-peek-massive-scale-aws/

"There is very little talk of public cloud, and that is because Amazon believes that, by its nature, cloud means it cannot be private. Over the long haul, Amazon believes the massive scale of the public cloud will mean that very few organizations will run their own datacenters."

"Those with the most cloud capacity in the most regions with the richest features will win the business, and with a few exceptions (such as financial services clouds or massive supercomputing centers with near 100 percent utilization and special needs hardware and software), the resources of the public cloud will not only be good enough, but will be better than what a lot of organizations could build and support themselves."

--------------------------

It does make you wonder about Spark betting their future growth on going up against companies like Amazon and Microsoft. But maybe enough 'private cloud' crumbs will fall under the radar of the public cloud behemoths to allow Spark to exist in the 'private cloud space?

Amazon AWS says they are spending about $NZ7.5billion to set up their data centre infrastructure in Auckland.
https://www.lancom.tech/our-resources/all-you-need-to-know-about-aws-data-centres-coming-to-auckland

I think this spending includes every expense under the sun, including staff salaries and power bills for few years of operation. But it is a big number, seemingly an order of magnitude larger than Spark is set to spend.

The Spark datacentre in Takanini took $NZ60m (albeit 2014 dollars) to set up
https://www.reseller.co.nz/article/558596/inside-60m-takanini-data-centre/

Albeit there is a significant expansion work at this site, a physical doubling of it in size, scheduled for completion in mid 2023 (Slide 34 Spark FY2024 to FY2026 Strategy). Spark's total new investment program into data-centres in NZ, looks to add up to $250-$300m (Slide 67 Spark FY2024 to FY2026 Strategy).




Spark Projected Data Centre Revenue to FY2026

Spark's total business to business capital investment program looks to deliver $4.1b-$4.3b in total IT and Managed Sevices revenue with 'the cloud' accounting for 45% of that - $1.8-$11.9b by 2026 (Slide 31 Spark FY2024 to FY2026 Strategy). That looks like a projected revenue gain of 60% over three years.

The worry I have about this is that it is all very well to set lofty goals. But when you see real sales information as quoted bekow (from PRHY2023 Slide 5}

----------------------------

"Competitive pressures squeezed margins in broadband and cloud."

CLOUD, SECURITY AND SERVICE MANAGEMENT REVENUE

$214m (4.5%) decrease vs. H1 FY22

Cloud mix-shift trend continues, with volume growth in lower-margin public cloud and co-location being offset by lower private cloud volumes and repricing.

----------------------------

You do wonder on the ability of Spark to execute their data-centre dreams.

SNOOPY

[Snoopy]

Another way to boost dividend payouts to shareholders -ahead of money earned-, is to pay out some company capital to shareholders to bolster their dividends. There is some evidence this is happening. The company's share capital has reduced by 5.2cps over the five years we are examining. That 5.2c makes up most of the difference between dividends paid out over that period and TCI NPAT over the same time-frame. However, shareholder capital does not contain imputation credits. So this does not explain how Spark can pay fully imputed dividends at a higher rate than its underlying earnings, no matter which of the three measures of NPAT earnings you choose to use. More investigation is required to see just what is going on here.


Just noticed this admission in the FY2021 to FY2023 Strategic Outlook, Slide 6.

"(Solid progress made) in the Dividend Sustainable total dividend of 25cps or above that is not supplemented by debt."

This is an admission that as the FY2020 drew to a close, the dividend was being 'beefed up' by taking on more borrowings. The last dividend paid during FY2020 was the interim dividend for FY2020. That dividend was only 75% imputed. Looking back further, the previous four semi-annual dividends were likewise only 75% imputed.

Spark management were obviously aware that 'borrowing to supplement the dividend' was not a sustainable policy. Since FY2021, all subsequent half year dividends have been fully imputed. But how (considering the mismatch between underlying earnings and dividends) ? That is the question I am still grappling with.

SNOOPY

[Snoopy]

Just noticed this admission in the FY2021 to FY2023 Strategic Outlook, Slide 6.

"(Solid progress made) in the Dividend Sustainable total dividend of 25cps or above that is not supplemented by debt."

This is an admission that as the FY2020 drew to a close, the dividend was being 'beefed up' by taking on more borrowings.

Spark management were obviously aware that 'borrowing to supplement the dividend' was not a sustainable policy. Since FY2021, all subsequent half year dividends have been fully imputed. But how (considering the mismatch between underlying earnings and dividends) ? That is the question I am still grappling with.


Now that I have found this 'admission of guilt' by Spark in 2020, my sniffer has gone into overdrive, hunting down those subsequently increased imputation credits earned. The first half of FY2020 was the beginning of the Covid-19 pandemic. Revenue for the whole FY2020 year ($3,623m) was up over FY2019 ($3,533m). But certain - unspecified - costs were down. The following notes are the results of my sniffing, seeking out where those additional operational profits might have come from.

What has changed from 'FY2019 to FY2020' and 'FY2019 to FY2021'?

1/ From AR2020 p60.
"As a result of Covid-19, Spark received a number of rent concessions....accounted for directly in the statement of profit and loss."

I see accommodation costs went up by $4m to $67m in the subsequent year (FY2021), while they fell $4m from FY2019 to FY2020 . Could that be a hint that there was $4m in rent relief in 2HY2020, when Covid-19 hit?

2/ I noticed that broadband costs reduced from $341m to $339m over FY2020 (AR2020 page 61), for a saving of $2m. That could be a reflection of the push by Spark to steer customers away from fibre broadband and onto their own wireless broadband. Broadband costs dropped another $10m over FY2022 (that means a $12m drop over two years).

3/ FY2020 say the reintroduction of depreciation on commercial buildings. This resulted in an incremental $7m tax deduction expense for the year together with a one off $10m deduction charge (AR2020 p93). That reduced equivalent tax for the year by $17, and increased before tax profit by the same amount. However in 2021 there was no more 'one of adjustment' and the incremental tax deduction expense was just $4m.

Expenses like this 'saved' flow through to FY2020 profits after tax 'per share' like this:

1/ + 2/ + 3/ = 0.72 ($4m + $2m +$17m ) = $16.6m (NPAT incremental increase for FY2020)
$16.6m / 1,867m = 0.9cps (NPAT incremental profit on a per share basis FY2020).

Repeating the comparison with FY2019, now looking at FY2021:

1/ + 2/ + 3/ = 0.72 ($0m + $12m +$4m ) = $11.5m (NPAT incremental increase for FY2021)
$11.5m / 1,867m = 0.6cps (NPAT incremental profit on a per share basis FY2021).

The two 12.5c dividends paid during FY2020 were only 75% imputed whereas the two 12.5c dividends paid during FY2021 were 100% fully imputed. A 75% imputation rate means that 9.375c of the dividend is fully imputed and 3.125c is not imputed. So to make that 75% percent imputed dividend 100% imputed, we need an extra 3.125cps of fully imputed earnings to be booked every six months (12.5c dividends were paid twice per year). In fact the incremental earnings between FY2020 and FY2021 went down from 0.9c to 0.6c. So it looks like changes to earnings from regulatory review, substituting for Chorus services and Covid do not explain the extent of increased profitability of the company.

AP2021 announced the FY2021 dividend payments of 25cps (AP2021 slide 3) were fully imputed, supported by resilient free cashflow. That is an odd thing to say because fully imputed dividends must come from actual fully tax paid profits. 'Cashflow' does not guarantee that! Unless, that is, Spark are still using free cashflow to pump up the tax paid in advance to give the impression that the increase in taxable earnings is sustainable!

SNOOPY

[airedale]

I have an entry in my diary that the Spark dividend is paid today. Has anyone received it?

[mshierlaw]

I have an entry in my diary that the Spark dividend is paid today. Has anyone received it?

Yep ...... it was at end of the day :D

[clip]

You do wonder on the ability of Spark to execute their data-centre dreams.

SNOOPY

I am also puzzled by the further investment in private data centers when AWS/MS are launching here. However you can't put your own hardware in those data centres, and putting your own hardware in a data center can be more cost effective than renting individual services from aws/azure - so I guess they are forecasting that demand remaining strong enough to make a profit

[Grimy]

I have an entry in my diary that the Spark dividend is paid today. Has anyone received it?

In my account at 2.37pm

[Ricky-bobby]

Fbu/gen & then spark Div! How good

[Snoopy]

When writing on a 'new' topic, I usually do a search on the thread on which I wish to write, looking for a hook, however tenuous, that I can link my 'new topic' to. This time I cannot even pretend I am linking up to anything Spark has done before. That gives me the space to pose the question 'What does it MATTR?'

This is not an essay on the decay of spelling. If, as a Spark shareholder, you have no idea what I am talking about (and I didn't until a few days ago either), MATTR is Spark's new fully owned SaaS (Software as a Service) project. So sudden is the rise of MATTR, I can't find a single mention of it in the last annual report (AR2022). Yet it now has its own websife:

https://mattr.global/

which reflects the global ambition of where Spark see this project going. So important is this project that it gets six slides of its own in the Spark FY2024 to FY2026 strategy document (slides 39 to 44).

MATTR is involved in the 'digital identity and verifiable credentials' market. At this point I would normally reveal to you the meaning behind the clever acronym that is 'MATTR'. But in my brief poking around the Spark presentations and the MATTR website, I have been unable to find out what it means! So there is a mystery for you Easter weekend sleuths to solve.

The most important slide in the Spark strategy presentation for FY2024 to FY2026 is Slide 42. This shows the total market for 'decentalised identifiers' rising from $48 million in 2021 to $28 BILLION IN 2031. No need to worry about how carving out Spark's slice of this market will be achieved of course. Although a first step has been taken by winning a New South Wales government contract that enables verifiable credentials to be issued via the NSW Government’s apps, and independently verified by third parties. MATTR is the technology partner on this NSW Digital ID project. No, the basic message that we Spark shareholders need to take on board from this is that we are all zillionaires already, (or as good as). If that sounds a bit cynical it is because I have seen so many high tech dreams evaporate over the years. But could it be that Spark is onto something here?

The first point to note is that MATTR is an internally developed Spark project. So it isn't built on the bluster of a bellicose show body (who turns out to be just another nobody). This means we haven't spent big shareholder dollars acquiring a vanity project. The second point to note is that security and avoiding scams is not just a growth part of the market. It is core to how the internet of the future must operate. A core feature of being able to have digital ID verification is to have 'storage verification space in the cloud'. So this aligns pretty well with markets where Spark see themselves moving to. IOW Spark are well positioned to be a 'test mule' for this technology.

Ah, but what about the competition your say? Well, emerging tech companies never worry about that. Because the emerging tech they are developing is ALWAYS SUPERIOR to anything else out there. If MATTR is now starting to sound risky in this context, we Spark shareholders can feel smug in the fact that -for us- this is a 'free lottery ticket' to future wealth. If the whole thing crashes and burns, it doesn't MATTR, because we SPARK shareholders paid nothing for our lottery ticket. Just like all that money we put into 'Spark Sport'. When it didn't work out, we Spark shareholders got off 'scot free', I think (kind of).

SNOOPY

[Nor]

"But in my brief poking around the Spark presentations and the MATTR website, I have been unable to find out what it means!"

Don't worry Snoopy, in my even briefer poking around the announcement I quickly decided it was just one more thing that could be hacked and not to trust it no matter what anyone says.

[Doug]

"But in my brief poking around the Spark presentations and the MATTR website, I have been unable to find out what it means!"

Don't worry Snoopy, in my even briefer poking around the announcement I quickly decided it was just one more thing that could be hacked and not to trust it no matter what anyone says.
ChatGPT also doesn't know what it might stand for!

[Ferg]

Snoopy - were you at the recent ASX presentation asking about Chorus?

[Snoopy]

Snoopy - were you at the recent ASX presentation asking about Chorus?


'Yes I was' (blatant lie). But since my memory is so poor, what was it I asked about Chorus?

SNOOPY

[Ferg]

No worries......I didn't catch the detail given my mind was elsewhere at the time. IIRC it was during the discussion on Ventia and a learned fellow mentioned CNU in passing .... meanwhile I'm putting 2 and 2 together and getting 5.

Cheers.

[Snoopy]

ChatGPT also doesn't know what it might stand for!


Right, so although I am still stupid on this subject, my stupidity has not yet been usurped by a brainy bot, Good to know. However, you (all) are not off the hook yet. I am setting an alternative puzzle. First a little background.....

I usually read before I go to bed. When I start reading something and I have no idea what is being said, that is usually a good hint to turn the bedside light out. Last night I was reading this:

-----------------------

Fixed - Active Wholesale Income

"Data and connectivity revenue decreased reflecting an ongoing S10 reduction in largely low end enterprise grade legacy products, price competition in wideband fibre products and migration of legacy services."

-----------------------

I had no idea what they were talking about last night and I have no idea now. Can anyone out there read 'telespeak'?

SNOOPY

[clip]

Customers are migrating off older, higher priced, slower connections, in favour of newer connections - both offered by spark and competitors, either way resulting in reduced revenue. I don't know what the 'S10' means however

[Snoopy]

Customers are migrating off older, higher priced, slower connections, in favour of newer connections - both offered by spark and competitors, either way resulting in reduced revenue. I don't know what the 'S10' means however

Thanks for that Clip.

The Samsung Galaxy S10 is a four year old cellphone that "has reached the End of Life and will no longer receive Android security updates."

That is what comes up when I stick S10 into Google. I am not familiar with this phone, or how it fits into the Samsung phone hierarchy. But this doesn't fit with the context of what you have translated Clip. If we are talking in the context of wholesale fixed lines, I don't see how a retail handset can have anything to do with it.

The only connection I can come up with, and it is a tenuous one, is that those who upgrade from a Galaxy S10, (and there will have to a lot of them at once for this comment to make sense) , will suddenly require a higher bandwidth to operate their now more data hungry phones that plug into more data hungry applications. I don't know what these applications might be (a step up in streaming video?). But if a whole lot more users demand live video at once, maybe this increases demand for the highest speed fibre? Thus this supercharges the demand for faster connections?

Of course I may be way off beam with this. It would make better sense if 'S10' referred to some industry standard router that was gradually being superseeded as a 'pinch point' in the fibre network. But what do I know (and on this topic 'very little')?

SNOOPY

[Snoopy]

Snoopy - were you at the recent ASX presentation asking about Chorus?


I am not sure if this is the presentation you were talking about.

https://edge.media-server.com/mmc/p/mnjnxvwk

This is the live version of the FY2024 to FY2026 strategic update. I have decided to belatedly 'attend'. Here are the notes I wrote down as I listened, and the time point at which the information spouted forth:

8:00: '$100m cost saving per year by using wireless broadband'
13:20: To de-commoditise the Spark offering, it is important to hold onto customer relationships, and leverage deep customer insights. Secondly it is important to maintain network capability to become the ideal business partner, aggregating Sparks own products but also a range of local and global providers.
19:33: Multi brand market approach allows Spark to participate in both the value (Skinny) and value added (Spark) end of the market.
23:00; Broadband has limited ability to differentiate and without 'ownership economics' ongoing cost increases put continuing pressure on margins. But Spark can cross sell and up sell within Spark's product portfolio. Cutting fibre input costs, by converting low data use households to 'fixed wireless broadband' can be a win/win for both customers and Spark. Can use data use records to target these lower use customers.
28:20: Small, Medium Enterprise business strategy is to leverage a leadership position in IT. $90m increase in the addressable IT services market from FY2021 to FY2026. Up to 100 small business employees look, Spark will look to deploy standardised packages. More than 100 SME employees? A 'curated IT and hybrid cloud solution' comes into play.
31:00: The introduction of hyperscalism to the NZ market (i.e. Amazon and Microsoft data centres), means Spark has had to change focus from a value chain perspective. Removing back office duplication has been achieved by sacking workers (euphemistically relayed as 'right sizing our cost base'). Spark want to move to 'software defined networks' and move into access and aggregation networks. Hybrid cloud is 'public cloud' (as distinct from 'private cloud'), but with a 'private service layer' over the top. Spark have 35 exchanges and multiple data-centres that can be leveraged to provide geographical resilience and capacity.
36:30: Most growth in last three years for Spark Health has been in 'core services': 'connectivity, ICT, cloud and transformation'. There is a significant opportunity in upgrading legacy systems, and Spark have built some platforms: e.g. 'Kete Waiora', linking health service providers and their patients and providing a patient more control over managing their records. Putting Internet of Things (IoT) devices into hospital beds helps in utilisation and understanding where those beds are. IoT can also help pinpointing the location of defibrillators and how to best access those in real time.
58:30: Exiting PSTN, 3G technologies (out by end of 2025) will provide cost savings. 6G not slated to come on line until late 2028 to 2030.
1:21:30: 80% of Spark's emissions come from electricity.
1:24:00: Revenue Growth Opportunities: Data use low compared to international peers. 5G means faster speeds and more data usage. 5G introduces 'network slicing', private networks as new revenue opportunities. With SMEs, the plan is to move more into the IT services space where Spark have a strong foundation via the hub model. The NZ healthcare sector is one of the least digitised and is going through significant reform, including electronic patient records. Digital identity, through MATTR, is an all new revenue area. These new revenue initiatives will more than compensate for discontinued legacy products, by at least $100-$150m.
1:29:00: Deploying more fibre will allow Spark to use more of their own network and so lower input costs. 5G will allow wireless broadband to grow from 30 to 35% of the market and reduce external input costs.
1:30:15: Investing in the cloud is a way of securing long term customer relationships and long term returns.
1:31:45 : Underlying CAPEX (excluding the proceeds from the TowerCo sale) is a net 10-11% CAPEX to sales ratio (covers maintenance and growth) .
!:33:40 : Net debt to EBITDAI ratio < 1.7 to maintain credit rating. (Note that EBITDAI is short for 'earnings before finance income and expense, income tax, depreciation, amortisation and net investment income.'
1:37:00: Q & A (see Part 2, post 2028)

SNOOPY

[clip]

It won't be referring to the galaxy S10. Something interested I noted in my searches, when looking at the detailed Financials for fy22 and fy23, in both years in the section on cloud KPI's - # of private cloud customers is falling. Isn't that at odds with their investor presentation saying they see growth or are investing further in private cloud? 🤔 seems odd to me

[Snoopy]

The following is my summary of the Q&A session, complete with the timing when each question was asked..

https://edge.media-server.com/mmc/p/mnjnxvwk

I have grouped the answers by topic, rather than chronologically.


Data-centres

1:39:00
Q/ Timing of data-centre(s) expansion program, verses revenue return?
A/ Expansion at Takanini already fully contracted. Will be looking to sign data deals as new builds roll out. Not a 'build it and they will come' program. First expansion at Takanini will come on line in mid 2023. Second stage not until 2026. Spark will give cashflow projections as the build out proceeds.

2:02:00
Q/ How does Spark plan to remain competitive in the data-centre market in the future?
A/ Spark has a first mover advantage and provides much of the connectivity that the new hyper-players (Amazon & Microsoft) will need. There is also an opportunity to partner with these new players.

2:03:15
Q/ 9-10% data-centre return? How is that defined? How do you see it evolving?
A/ Look at incremental returns new data centre investment generates.on a post tax basis. Look at the invested capital that goes into support that. Then divide one by the other. Return comes on stream as the build scales (Takanini due for completion June 2023 is 85% contracted, 100% committed). Data deals are ten year plus time frame contracts with certainty of returns priced in.

2:07:30
Q/ Interrelationship between public and private cloud?
A/ Customers in the Private cloud, are more likely to own their own infrastructure (but not always). A customer can have higher returns with Private cloud, but have to pay for their own capital investment. Private cloud tends to be onshore. A Public cloud, is where a customer does not own their own infrastructure and it is lower margin. The Hybrid approach allows customers to move workloads between public and private depending on what customer needs are: e.g. security, licensing needs.. Private cloud should be thought of more as a product. Datacentres are more akin to a property investment (with a number of tenants).

2:14:00
Q/ How does the Spark view of data-centres being a 'mature market' tie in with the massive investment by the likes of Amazon AWS announcing a $7.5billion investment in data-centres in NZ?
A/ The $7.5b includes downstream external costs so does not all relate to data-centres. Part of that capacity in NZ is likely to be regional (supporting Australia). Furthermore the 'green international marketing tool' of running a data-centre from purely renewable power resources will not have gone unnoticed by AWS. Lot's of data-centre growth in Australia (500MW in NSW alone announced last year).


Strategic Business Direction

1:42.00
Q/ What business areas do you see contracting? e.g. Non-infrastructure cloud?
A/ Broadband market will remain under pressure. Private cloud market had revenue down in the half. Private cloud shifts from a growth business to a more mature business. Therefore we start to manage it for margins, shifting CAPEX to data-centres and at the same time investing in the 'hybrid cloud'.

1:43:30
Q/ Any plans for more co-investment such as with the cell tower sales?
A/ No other asset classes are significant enough in their own right for Spark to want to package as 'for sale' right now. Spark is not like Telstra which has more infrastructure assets available for sale. For high growth markets where shareholders can get a good return (e.g. data centres), Spark intends to keep those 'in house'.

2:18:45
Q/ How to compete with OneNZ and 2 Degrees with their newly announced satellite coverage options?
A/ Satellite for mobile is still early development. By the end of 2024 users 'might be able to text'. By the end of 2025 'some voice capability may become available'. Spark intend to partner with satellite technology providers at a later date. Spark is currently doing more work around enterprise broadband using satellite technology, and a trial with larger enterprise customers who have multi-sites will launch shortly.


MATTR

1:47:00
Q/ What proportion of the $28b market identified for digital recognition does MATTR think it can capture? What benefits are there working under the Spark umbrella?
A/ No dollar answer on what part of this international market can be snared, but it is a multinational growth opportunity.. Deep tech and R&D cycles are quite different to an operating business. A strong backer gives MATTR freedom to do the work they set out to do.

1:53:00
Q/ What CAPEX is it projected will be needed to develop MATTR going forwards?
A/ MATTR started with just 6 people four years ago in an evolving market. Resources MATTR has now is entirely appropriate to the level of market maturity and to keep MATTR in a leadership position. A key differentiator for MATTR is interoperability.

2:17:00
Q/ Does MATTR use blockchain technology for verification purposes?
A/ The architecture can accommodate the use of distributed ledgers but it doesn't need to. Most clients do not require these for the solutions they are embarking on. MATTR can achieve the properties of decentralisation, anchoring into existing groups of tract and decentralised Public Key I infrastructure (PKI), without needing to use blockchain at all.


Financials

1:44:30
Q/ What is the outlook for growth above inflation?
A/ 5G! MATTR is another growth opportunity. Thirdly, selling capacity already built into data centres (most costs are incurred before the income stream builds)

1:49:30
Q/ Growth cost reductions, projected as about $60m per year. = Business as usual?
A/ Any planned 'cost out' is allocated to very specific areas, together with a detailed program that drives costs down on an ongoing basis.

2:20:15
Q/ What is the free cashflow growth split between the 'new investment space' and 'core development of existing business'?
A/ Majority of three year projected cash-flow growth is coming from core operations. The $350m of incremental investment announced doesn't really come on line until FY2026, and even in the data-centre space they have to scale some income over time.

2:20:15
Q/ Dividend imputation guidance over the next three years?
A/ Dividend guidance is given annually. But Spark's aspiration is to grow the dividend over time and the ambition is to have that fully imputed.


5G mobile

1:51:00
Q/ 5G spectrum availability and capacity?
A/ Nearing end of spectrum allocation discussions with the government. Expect an announcement in months/weeks. mm wave still pending. 600Mhz helpful to overcome rural topography. NZ more spectrum rich than most other countries. Coming out of 3G, Spark can reallocate that spectrum. 5G network can be continually densified over time.

1:56:30
Q/ What is the addressable market for Wireless Broadband (Spark mentioned 35% goal by 2026)?
A/ 5G will drive this.Also understanding of data capability of households. The 35% is an interim target and use patterns out into the future will determine any targets beyond that. The relentless upward price of Chorus broadband gives the opportunity to adjust wireless prices upwards for some customers.

1:58:30
Q/ 5G monetisation strategy, more detail?
A/ Monetising gaming experience - low latency with 5G standalone ideal for this. Also entertainment more broadly. There are annual price reviews, and further opportunities for wireless broadband and the enterprise market.with convergence of technologies.

2:15:45
Q/ Functionality of 5G tied to the public cloud, not on premises equipment?
A/ Different vendors play in the 'stand alone' 5G space. Hyper-scale databases with a standard vendor is one option. But one can use a standard vendor with the computing power of the workspace.


Customer management

2:09:00
Q/ Cybersecurity?
A/ Spark has a large team, numbering 180. This includes a 24/7 security team fighting DDOS global attacks, but also people who work in 'security response' and governance, and 'security infrastructure'. These are people across all different parts of the business. Security is across all phases of designing and building and from operational perspectives. What happened? How did it happen? And what can we learn from this? are the questions asked when security is breached. This is a culturally evolving space with input from overseas experience (security issues often are seen overseas before they pop up as a problem here.) Spark even work with the GCSB.

2:09:00
Q/ How long is customer data stored?
A/ Spark's privacy policy very specific about what data Spark collect and use. Security is built into all systems, Customers will continue to be happy to share it with Spark if they can see the benefit. There are too many data types to go into individually. Spark use AI modelling in which they input customer data to enhance the customer experience. But Spark do not store data they do not need that might create bias e.g. gender data. Furthermore, Spark has a 'digital trust team' that provides overarching policy on data collection.


Spark Personnel

2:18:00
Q/ Skills training partnerships to combat lack of IT skills in the workforce?
A/ Spark are already working with a range educational institutions like Te Pukenga (the old polytechnic colleges combined into one) , plus mirco-credential certifications with partners in the technology and product space. Rethinking variants of these partnerships concentrating on the internal skills Spark needs to bring business opportunities to life.


SNOOPY

[Snoopy]

The following is my summary of the Q&A session, complete with the timing when each question was asked..

https://edge.media-server.com/mmc/p/mnjnxvwk


I don't know whether anyone else on this forum tuned into this presentation. It was nearly two and one half hours long after all. I had never seen CEO Jolie Hodson in action before, but in that Q&A session at the one hour forty mark, I was mightily impressed. In fact I had never seen anything quite like it.

Jolie was on the stage with her senior management team, ten people I total I think. Then various analysts were firing questions at her, and she would say something like.

"Well that is actually three questions which I will split up like this. Senior Manager X (SMX) will answer this bit. SMY will answer this bit. and SMZ will answer this bit."

To have the instantaneous brain power to deconstruct a 'surprise question', and do that kind of delegation in an instant, I think shows someone who is extremely smart and right on top of their game. Jolie obviously had total confidence in all her senior management, although if they were to stumble Jolie has enough overall business knowledge to 'keep them on track'. When one question started to get a bit technical Jolie interrupted her SM and said, :We will finish the answer privately later", and the Q&A rolled on. It was a very tightly run Q&A, yet everyone got their answers.

If you want to know how to run a Q&A session, this is a very good example of what you should do. But even then, you would be hard pressed to get someone of the caliber of Jolie Hodson to chair it. I think we shareholders are pretty lucky to have Jolie Hodson as Spark CEO.

SNOOPY

[Snoopy]

The two 12.5c dividends paid during FY2020 were only 75% imputed whereas the two 12.5c dividends paid during FY2021 were 100% fully imputed. A 75% imputation rate means that 9.375c of the dividend is fully imputed and 3.125c is not imputed. So to make that 75% percent imputed dividend 100% imputed, we need an extra 3.125cps of fully imputed earnings to be booked every six months (12.5c dividends were paid twice per year). In fact the incremental earnings between FY2020 and FY2021 went down from 0.9c to 0.6c. So it looks like changes to earnings from regulatory review, substituting for Chorus services and Covid do not explain the extent of increased profitability of the company.

AP2021 announced the FY2021 dividend payments of 25cps (AP2021 slide 3) were fully imputed, supported by resilient free cashflow. That is an odd thing to say because fully imputed dividends must come from actual fully tax paid profits. 'Cashflow' does not guarantee that! Unless, that is, Spark are still using free cashflow to pump up the tax paid in advance to give the impression that the increase in taxable earnings is sustainable!


I am looking at this from another angle, starting with 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A Nil imputation credit balance means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the two year period following EOFY2020, what fully imputed dividends were paid out?



Dividends Paid FY2021 & FY2022Gross DividendNet DividendImputation Credits


Second HY dividend FY2020$319.4m$230m$89.4m


First HY dividend FY2021$320.8m$231m$89.8m


Second HY dividend FY2021$323.6m$233m$90.6m


First HY dividend FY2022$325.0m$234m$91.0m


Total$360.8m



Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



-------------------------

Now, how does that $360.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:



Income Tax paid over FY2021$188m


Income Tax paid over FY2022$160m


Imputation Credit Balance Owing EOFY2022$16m(See AR2022 p120)


Total$364m



This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $16m of imputation credits owing! But as nztx pointed out in post 2004, the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year, and the Spark tax financial year that ends 9 months later. That means the unpaid imputation credit balance of $16m is actually an accounting construct, caused by Spark choosing to put a line under their year at 30th June, while the same $16m is a bill 'not yet due' from an IRD perspective.

SNOOPY

[clip]

https://www.nzherald.co.nz/business/analysts-verdict-on-sparks-three-year-plan/YGZXKMU7ZZEXHPDZ4WSB3TKLVA/

In financial terms, Spark said it was targeting between 2 and 4 per cent revenue growth per year for 2024 to 2026 and low-to-mid single-digit operating earnings growth.
Analysts were not bowled over by Spark’s three-year blueprint, and made no significant changes to their projections.
A Forsyth Barr team (Aaron Ibbotson, Matt Montgomerie and Benjamin Crozier) said the briefing involved “underwhelming targets” but was “reassuring”. They kept their rating at “outperform” and their target price at $5.50.

Jarden’s Arie Dekker and Grant Lowe kept their rating at overweight but chipped their target down from $5.15 to $5.11 for a strategy they said was “meeting expectations” (Spark’s shares closed at $5.04 ahead of Easter. The stock is up 4.1 per cent for the year).
While the headline numbers were in line with existing forecasts, analysts still found some interesting elements.
Forbarr’s team said “Mattr was the highlight of the day” from the three-year strategy briefing.
“Mattr is a globally credible inhouse startup within the small but rapidly growing digital identity market ... which is still in its infancy and is expected to grow at a 90 per cent-plus compound annual growth rate through to 2031,” they said.

[Snoopy]

I am looking at this from another angle, starting with 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A Nil imputation credit balance means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the two year period following EOFY2020, what fully imputed dividends were paid out?



Dividends Paid FY2021 & FY2022Gross DividendNet DividendImputation Credits


Second HY dividend FY2020$319.4m$230m$89.4m


First HY dividend FY2021$320.8m$231m$89.8m


Second HY dividend FY2021$323.6m$233m$90.6m


First HY dividend FY2022$325.0m$234m$91.0m


Total$360.8m



Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



-------------------------

Now, how does that $360.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:



Income Tax paid over FY2021$188m


Income Tax paid over FY2022$160m


Imputation Credit Balance Owing EOFY2022$16m


Total$364m



This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $16m of imputation credits owing! But as nztx pointed out in post 2004, the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year, and the Spark tax financial year that ends 9 months later. That means the unpaid imputation credit balance of $16m is actually an accounting construct, caused by Spark choosing to put a line under their year at 30th June, while the same $16m is a bill 'not yet due' from an IRD perspective.


So far so good. But what about the company earnings that were used to pay these dividends quoted above? The earnings I use here are the current year earnings, and then I assume tax will be taken off those earnings at a rate of 28% (I call this underlying earnings)



Underlying EarningsGross EarningsNet Earnings
Imputation CreditsReference


FY2021$553m$398m
$155m
AR2021 p100


FY2022$581m$418m
$163mAR2022 p119


Total$318m



Below is fundamentally the same information, but this time expressed in the form of declared earnings and actual tax paid. This shows a higher tax rate than 28% (because the imputation credit figures are all higher).



Declared EarningsGross EarningsNet Earnings
Imputation CreditsReference


FY2021$553m$384m
$169m
AR2021 p62


FY2022$581m$410m
$171mAR2022 p79


Total$340m



Why is the declared tax more than the underlying tax? This could be because of the timing of tax payments. where actual tax paid in a year is adjusted because of prepayments already made under different forecast earnings assumptions. In addition there are some 'overseas profits' that have resulted in tax being deducted at a higher final rate than 28%. I am not sure where these 'overseas profits' are from. Finally there are some revenue gains and/or losses that are not assessable for tax.

To assess whether the imputation credits earned are sustainable, I would use 'underlying earnings'. Underlying earnings are not corrupted by tax paid or refunds due to transactions outside of the FY2021 to FY2022 (inclusive) study period. Compare the information in the quoted post and you will see the 'underlying earnings' income tax payable does not support the quoted imputation credits on the dividends paid. ($318m < $360.8m). Furthermore, neither do the imputation credits deposited from the 'declared earnings' cover the imputation credits attached to the dividend ($340m < $360.8m). I am therefore forced to conclude that to pay the fully imputed dividends they have done, Spark must have put some extra money in the IRD income tax pot, despite it not being due. This is the only way a company can pay fully imputed dividends from earnings that are less than the sum of those dividends. This extra money does not come from thin air though. It must have come from capital that is already on the company balance sheet. So what was the shareholder funds on the balance sheet of Spark at EOFY2020, EOFY2021 and EOFY2022?




Shareholder FundsReference


EOFY2020$1,493mAR2020 p55


EOFY2021$1,503mAR2021 p63


EOFY2022$1,475mAR2022 p90



Shareholders funds have bounced around over a '3 end of year period'. Over that time, at least $18m was 'lost'. (actual amount lost was $60m, see post 2035). If that $60m had been used to pay 'income tax not billed', that would neatly bring the 'declared tax paid' plus 'top up' to:

$340m + $60m = $400m

$400m is more than enough for Spark to pay out the referenced $360.8m of imputation credits attached to dividends paid over those two years.

The most plausible explanation of this is that Spark are fudging the 'full imputation credit' status of their dividends by making a small top up 'tax payment not billed' from the capital account. I would love to be proved wrong about this' But we know Spark have topped up the dividend payment (albeit without topping up the imputation credit) in this way before (e.g. FY2020) . Is there another plausible explanation for Spark paying four fully imputed dividend that exceeds their earnings for this two year period under scrutiny?

SNOOPY

[Ferg]

Hey Snoopy

I have not absorbed your posts in detail but here is a quick and dirty way to see if imputed dividends are sustainable: compare the dividend history to the balance in the imputation credit account. On the assumption all other relevant factors remain the same, if the imputation credit balance is not decreasing, then you could assume imputed dividends are sustainable. If however, the balance in the ICA account is reducing over the years, that implies the rate at which IC's are being used on declared dividends is higher than the rate at which income tax is being paid. Under that scenario assuming all other factors remain the same, imputed dividends may not be sustainable. The rate of decline relative to the dividend will tell you when dividends will cease being fully imputed.

[Snoopy]

Hey Snoopy

I have not absorbed your posts in detail but here is a quick and dirty way to see if imputed dividends are sustainable: compare the dividend history to the balance in the imputation credit account.


Thanks for the suggestion Ferg. But, for once, I think I am one step ahead of you. This is what I did in my post 2030.



On the assumption all other relevant factors remain the same, if the imputation credit balance is not decreasing, then you could assume imputed dividends are sustainable. If however, the balance in the ICA account is reducing over the years, that implies the rate at which IC's are being used on declared dividends is higher than the rate at which income tax is being paid. Under that scenario assuming all other factors remain the same, imputed dividends may not be sustainable. The rate of decline relative to the dividend will tell you when dividends will cease being fully imputed.

I understand your argument, but in post 2032 I am trying to answer a different question. Namely how were those imputation credits created in the first place? And the answer is from tax paid profits - right? But what if those tax paid profits were INSUFFICIENT to create those imputation credits paid out with the dividends? This is the question I am grappling with.

SNOOPY

[Snoopy]

Shareholder FundsReference


EOFY2020$1,493mAR2020 p55


EOFY2021$1,503mAR2021 p63


EOFY2022$1,475mAR2022 p90



Shareholders funds have bounced around over a '3 end of year period'.


This post is really an appendix to post 2032

I think looking at shareholder funds as I have above is a bit simplistic. As well as operational profits, shareholder funds are also affected by the annual revaluation of derivatives, required by accounting standards. So to find the true effect of normal operations on shareholder funds, I need to 'back out' the effect of what happened to the derivatives, over the appropriate comparative timeframe(s).



Derivative Valuation Changes
FY2022
FY2021
Annual Change
FY2021
FY2020
Annual Change


Short Term Derivative Asset
$5m
$12m
($7m)
$12m
$1m
$11m


Long Term Derivative Asset
$13m
$24m
($9m)
$24m
$60m
($36m)


Short Term Derivative Liability
($1m)
($4m)
$3m
($4m)
($5m)
$1m


Long Term Derivative Liability
($77m)
($91m)
$14m
($91m)
($156m)
$65m


Total


$1m


$41m



This shows the change in derivatives delivered a total uplift of balance sheet assets assets of: $1m + $41m = $42m, over the two year period we are looking at.

But we also know the total shareholder funds shrunk by: $1,475m - $1,493m = - $18m over this period.

This means operational shareholder funds must have shrink not by $18m (as a cursory inspection of the the quoted post might suggest), but by a total of: $42m + $18m = $60m over that time.

SNOOPY

[Snoopy]

My sniffer has come out again trying to 'hound out' where any extra income tax payments may have been made to boost the company imputation credit account. I went back to the income statement, as I feel sure the information I seek must stem from there. I have found an entry of note under 'Other Comprehensive Income' which says: "Change in hedge reserves net of tax. $71m" (AR2022p79)

I wondered what tax it is they are referring to? I immediately looked for a line under 'Other comprehensive Income' detailing the tax they are talking about. But guess what, no other mention of tax! So this had me wondering if whatever tax was being referred to here had been stuck above the other comprehensive income part of the income statement with the other income tax entries that form part of 'normal operating profit'? Yes I am speculating here, not really knowing what I am talking about! But at least I had a lead to follow to section 5.1, so this is where my massive sniffer headed.

I do not for one minute claim to be an expert in derivative and hedge accounting. So take anything written below this line with a grain of salt. But this is what I interpret is being said in this section. From AR2022 p112, Section 5.1 "Derivatives and Hedge Accounting."

"Derivatives in hedge relationships are designated based on a hedge ratio of 1:1. In these hedge relationships the main source of ineffectiveness is the effect of the counter-party and Spark's own credit risk on the fair value of the derivatives, which is not reflected in the change in the fair value of the hedged item attributable to changes in foreign exchange rates and interest rates."

What I think this means mentioning the 1:1 thing is that each hedge is based around a real transaction. If it wasn't 'one to one' then part of the hedging would be speculative and would require a different treatment under accounting rules. The fact that the hedge transactions themselves are not mentioned as 'a high risk to note', would suggest to me that when the hedges are finally settled there will be no big surprise in store waiting for either participant in the hedge transaction. Both counterparties to the hedge had full knowledge of the risks involved when any agreement was signed off, provided the agreement continues for the full hedge term.

The balance sheet revaluations required annually, are a reflection on what would happen to the hedge if it was terminated at the end of the set reporting period. Because a hedge is classed as a 'scheme of arrangement' by the IRD, both counter-parties to the hedge would have to declare any losses or profits on a shortened hedge deal to the IRD (one side would suffer an unexpected loss while the other side woudl get an equal and opposite windfall gain). Gains and losses on schemes of arrangement are taxable in the eyes of the IRD.

Now we move to page 113
"The movement in the hedge reserves includes $98m in the change in fair value of the interest rate swaps less $27m associated deferred tax."

$98m - $27m = $71m. If we look back to the profit and loss statement that looks to me as though it is the same "Change in hedge reserves net of tax. $71m" entry in the comprehensive income statement. So I think the 'tax' referred to in the income statement is this $27m in deferred tax. But why is the tax deferred?

I think the tax is deferred because such a deferred tax bill will only be incurred by Spark if this particular hedge arrangement is terminated early. However, there is no intention of terminating this hedge arrangement early. Indeed if the hedge runs its full course the cash payments between counterparties will be as originally contracted. There will be no windfall profit or loss on the contract. So there will be no capital tax on winding up this contract due to the IRD. This means the 'deferred tax' on this hedge arrangement, so carefully referred to in the accounts, is in effect an accounting construct. As long as the hedge runs its course, Spark will never have a pay this deferred tax liability, despite it sitting there in black and white on the books.

Is my interpretation on what is being journalled here correct?

If so it means I have come up short (again) on sniffing out any extra income tax that Spark might be paying!

SNOOPY

[Ferg]

Hey Snoopy

Apologies for the belated suggestion when you had already had a crack at it. My skim read of #2030 should have alerted me to that.

Also apologies in advance for the technical post but this is hard to explain without a whiteboard and worked examples. You are mostly correct.

Deferred tax has no impact on current tax liabilities, and by definition, has zero impact on imputation credits. Imputation credits arise based on payment of income tax liabilities to the IRD and are exhausted (primarily) via dividend payments to shareholders.

Deferred tax arises when there is a differing treatment of an item for tax purposes versus accounting purposes, which is due to a timing difference. Take for example depreciation: whilst the company elects to depreciate at one rate, the IRD only allows deductions at their stipulated rates. This gives rise to either a deferred tax asset or a deferred tax liability depending on which figure is larger. Note that any such balance in the DTA or DTL account will eventually unwind itself back to zero over time for each item subject to deferred tax.

Same applies to items that are part of comprehensive income: such items may have a differing treatment for tax purposes versus accounting purposes due to timing (which gives rise to a deferred tax asset or liability), or in fact there may not be a differing treatment and such items do impact the current tax liability. BUT in these cases the value does NOT flow through the tax expense figure disclosed higher up in the P&L (being the figure prior to NPAT).

The tax notes will split the tax expense in the P&L into current tax (which goes into the current tax liability account on the Balance Sheet) and deferred tax (which goes into the deferred tax account also on the Balance Sheet). However, other movements in either of those 2 accounts may arise due to the tax effect of items disclosed under comprehensive income (or in the case of the current tax liability account, that will reduce based on payments to the IRD). You were wondering in an earlier post is Spark were pre-paying tax - if that were the case then I would expect the current tax liability account to be zero and instead there would be a tax receivable asset.

To understand tax you need to look at the notes supporting the tax calculation in the P&L, the notes you already found for the derivatives, but also the notes for the current tax liability and the deferred tax asset and/or liability lines in the Balance Sheet. Edit: and you need to look at the notes supporting the ICA balance, if any.

One thing you will find in the note that supports the tax expense line in the P&L is a reference to 'permanent differences' - these are items that for tax purposes are either income items that are not assessable or expense items that are not deductible. For example, half of entertainment costs is never tax deductible but it still a valid accounting expense...which is a permanent difference. So taxable profit will usually differ to accounting profit, so unless you are using the taxable profit in your calculations there will always be mysterious over and/or under payments of tax relative to the number you are using.

I could probably unpick it but paid work awaits....even at this hour.

[Snoopy]

I went to the income statement, as I feel sure the information I seek must stem from there. I have found an entry of note under 'Other Comprehensive Income' which says: "Change in hedge reserves net of tax. $71m" (AR2022p79)

I wondered what tax it is they are referring to? I immediately looked for a line under 'Other comprehensive Income' detailing the tax they are talking about. But guess what, no other mention of tax! So this had me wondering if whatever tax was being referred to here had been stuck above the other comprehensive income part of the income statement with the other income tax entries that form part of 'normal operating profit'? Yes I am speculating here, not really knowing what I am talking about!




Items that are part of comprehensive income: such items may have a differing treatment for tax purposes versus accounting purposes due to timing (which gives rise to a deferred tax asset or liability), or in fact there may not be a differing treatment and such items do impact the current tax liability. BUT in these cases the value does NOT flow through the tax expense figure disclosed higher up in the P&L (being the figure prior to NPAT).

Deferred tax has no impact on current tax liabilities, and by definition, has zero impact on imputation credits. Imputation credits arise based on payment of income tax liabilities to the IRD and are exhausted (primarily) via dividend payments to shareholders.


Thanks for letting me know the particular highlighted text selection of mine was definitely wrong. I thought it was likely wrong. Then the fact that I was able to (later) identify this tax in question as 'deferred tax' would have meant that even if I had been right, there is no way that 'deferred tax' could be counted as part of 'income tax paid' anyway. At any rate one more possibility of where the imputation credits I am seeking came from is eliminated. So that helps the cause.

SNOOPY

[Snoopy]

Imputation credits arise based on payment of income tax liabilities to the IRD and are exhausted (primarily) via dividend payments to shareholders.


I am going to pull you up on this one Ferg, on your your normally succinct and to the point explanations. In this instance, I think that you have put an extra word into the sentence I am quoting above, which I have highlighted in bold, that does not need to be there. I believe that a company creates imputation credits by the simple act of handing over money to the IRD, and that is all you need to say.

Whenever I hand my money over to the IRD, I do not have to prove it is to extinguish an income tax liability. The IRD always take my deposits at face value, whether I have an existing tax liability or not. In the same way I believe this is also true for companies. If they wish to pay the IRD income tax over and above their tax liability, with the intention of paying out a fully imputed dividend from what, -from the perspective of a future backwards facing telescope- would been seen as 'future earnings', then they are free to do so.

IOW the IRD do not complain if a company pays tax early. And the mere fact that tax has been paid automatically creates imputation credits, whether there was a tax liability due or not.

SNOOPY

[Snoopy]

You were wondering in an earlier post is Spark were pre-paying tax - if that were the case then I would expect the current tax liability account to be zero and instead there would be a tax receivable asset.


Interesting you should highlight this. If I look at the FY2022 Spark balance sheet, there is an entry in the current assets 'tax recoverable'. That is a tax receivable asset exactly as you describe. Therefore we do have the hard evidence - the smoking gun (in plain sight)- that you suggested I needed to find. Spark really was paying tax in advance of their tax liability!?!

OTOH the current tax payable is shown as $40m, not zero. But I have explained this before. I believe that $40m is an accounting construct caused by the fact that Spark choose to end their FY2022 tax year on 30-06-2022, whereas the IRD Spark tax year for FY2022 ends on 31-03-2023. So as far as the IRD are concerned they were not owed $40m on 30-06-2022. Despite being in Spark's balance sheet for FY2022, that $40m recorded as 'current tax payable' is not yet payable. It is not a real liability at all - yet.

SNOOPY

[Ferg]

I am going to pull you up on this one Ferg, on your your normally succinct and to the point explanations. In this instance, I think that you have put an extra word into the sentence I am quoting above, which I have highlighted in bold, that does not need to be there. I believe that a company creates imputation credits by the simple act of handing over money to the IRD, and that is all you need to say.

Whenever I hand my money over to the IRD, I do not have to prove it is to extinguish an income tax liability. The IRD always take my deposits at face value, whether I have an existing tax liability or not. In the same way I believe this is also true for companies. If they wish to pay the IRD income tax over and above their tax liability, with the intention of paying out a fully imputed dividend from what, -from the perspective of a future backwards facing telescope- would been seen as 'future earnings', then they are free to do so.

IOW the IRD do not complain if a company pays tax early. And the mere fact that tax has been paid automatically creates imputation credits, whether there was a tax liability due or not.

Nice catch Snoopy and you are correct. I do try to be clear in my wording to try and avoid misunderstandings or misinterpretations when it comes to financial posts. The reason I included the word 'liabilities' (which was a late addition I will add) is because I didn't want it to be confused with 'income tax expense'. In hindsight, the word 'liabilities' does not need to be there and I guess it also reveals two things: I work with clients in such a way that we do not prepay tax unnecessarily and secondly, I made the unstated assumption that it usually not good business practice or effective use of cash to pay tax when you don't need to. I guess my bias was showing. Nice catch nonetheless.

[Ferg]

Interesting you should highlight this. If I look at the FY2022 Spark balance sheet, there is an entry in the current assets 'tax recoverable'. That is a tax receivable asset exactly as you describe. Therefore we do have the hard evidence - the smoking gun (in plain sight)- that you suggested I needed to find. Spark really was paying tax in advance of their tax liability!?!

Were they paying tax in advance of their liability? Possibly, possibly not. Keep in mind an amount receivable (aka a refund) can arise in a couple of ways. One is paying in advance of estimated liabilities. IOW I roughly estimate the tax liability is $12m based on a fag packet calculation, but I have paid $14m so I'm expecting a refund of $2m (this is the bad use of cash I touched in my previous post).

OR more likely is that either provisional tax liabilities (or the self assessed liability based on advice and proper calculations is $12m) so I paid the full $12m. The tax was later re-assessed after the annual report was prepared, and it was found the tax bill should have only been $10m, giving rise to a $2m receivable which was not resolved before the end of the next reporting period.

Despite appearing the same these two are different in that the first is based on an unknown or estimated tax assessment, whereas the second was based on an initial assessment that was later revised either in light of new information, or a tax assessment that differed to the calculations used for annual reporting purposes, or there was some sort of ruling where the IRD position or original assessment was challenged and the taxpayer won etc. In such a case, the tax was 'prepaid" but not in a willy nilly fashion - it was paid to avoid penalties, subject to being finalised. IOW they were being prudent given the possible penalties of getting it wrong would exceed interest foregone on deposits (or interest incurred on the funds borrowed to prepay that tax). Safer to pay it first and argue later, than to not pay it and lose the argument later.

I'm not an expert on IFRS reporting but keep in mind that Spark may have to split amounts receivable in either a different tax jurisdiction or different tax period, from amounts payable in other tax jurisdictions or other tax periods. The IFRS part I don't know is around whether this is still required if there is the ability to ask the IRD to offset the two amounts (as in transfer the refund due in one period to the amount payable in another period). It could be that the amount receivable may reduce the amount actually payable if it is the same tax jurisdiction but for accounting purposes Spark are required to split the amounts receivable from the amounts payable (any IFRS experts can chip in now....).


OTOH the current tax payable is shown as $40m, not zero. But I have explained this before. I believe that $40m is an accounting construct caused by the fact that Spark choose to end their FY2022 tax year on 30-06-2022, whereas the IRD Spark tax year for FY2022 ends on 31-03-2023. So as far as the IRD are concerned they were not owed $40m on 30-06-2022. Despite being in Spark's balance sheet for FY2022, that $40m recorded as 'current tax payable' is not yet payable. It is not a real liability at all - yet.

Do we know for a fact the IRD tax year for Spark ends on 31 March? Anyone with a non-standard balance date (being anything other than 31 March) can have a matching filing period with the IRD. This is evidenced by the varying prov tax dates for taxpayers with non-standard balance dates. So I query the bolded part of your quote. I don't think that is correct. {assumption here is we are referring to NZ IRD}. I would be very surprised if their 'tax year' differed to their accounting year. I'm aware someone posted previously that the imputation credit balances are worked to 31 March each year, but that is not the same thing as the tax filing period with the IRD.

The rest of that quote appears reasonable, but I disagree with the final 9 words that it is not a real liability. Yes it is correct that it is not yet due to be paid to the IRD (assuming it is not already in arrears and has not been assessed), but it is still a liability based on the taxable profit derived up to the end of the reporting period. Take for instance a loan with scheduled repayments - those amounts payable later but not due now still meet the definition of a liability. Much like the tax estimate, they are not payable now, but they will be payable later ergo they are a real liability or have a very high probability of crystallising into a real liability.

P.S. I admire your tenacity with this given tax is not an easy topic.

[Snoopy]

Do we know for a fact the IRD tax year for Spark ends on 31 March? Anyone with a non-standard balance date (being anything other than 31 March) can have a matching filing period with the IRD. This is evidenced by the varying prov tax dates for taxpayers with non-standard balance dates. I would be very surprised if their 'tax year' differed to their accounting year. I'm aware someone posted previously that the imputation credit balances are worked to 31 March each year, but that is not the same thing as the tax filing period with the IRD.


Fair call. No I don't know if the Spark tax year ends on 31st March. I formed this opinion after the following exchange on this thread: Posts 1823, 1824, 1825 and 1826



I hadn't thought about the possibility of a tax refund shifting the imputation credit account into the negative. Since the refund would have been authorized by the IRD themselves, it would seem a little unfair that such a refund could cause a tax penalty!




Imputation Credits can run a negative balance at any time APART FROM 31 March of any year, so I doubt that penalty would apply in this instance - more likely, Imputation Credits attached to dividends prior to the payment of a known liability. It's fairly common practice.



Yes, that's correct - something to consider where company balance date is other than 31 March

Where there is a difference or negative - Tax credit purchases via authorised intermediaries is another thing to take into account and can be done up to last installment date for the year in question..



Oddly, although tax purchases through an intermediary backdate the tax for UOMI (Use of Money Interest) and penalty purposes, the Imputation Credit effect is not back-dated


The consensus at the time seemed to be that a time shifted balance date between the reporting year and the tax year was the most likely explanation for the negative imputation credit balance. Perhaps JeffW's comment that 'this is fairly common practice' swayed me towards this line of thinking at the time (and since). Nevertheless there is more evidence out there. Here is the profit and dividend record from the nine reported years that Spark has existed under that name.





FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
FY2022
Total



Imputation credit balance EOFY
+$46m
+$30m
-$6m
-$47m
-$45m
-$21m
nil
-$18m
-$16m



Overall Cashflow
$94m
($130m)
($28m)
$0m
$3m
($1m)
($1m)
$19m
($1m)
($45m)



Operating Cashflow
$614m
$630m
$716m
$717m
$777m
$777m
$903m
$858m
$841m
$6,833m





Declared NPAT
$460m
$375m
$370m
$418m
$385m
$437m
$427m
$354m
$410m
$3,636m



Net Shareholder Equity Raised
$21m
$4m
-$1m
$12m
$6m
$4m
$4m
$135m
$21m
$206m



Dividend paid
$291m
$330m
$430m
$458m
$458m
$459m
$459m
$461m
$467m
$3,813m





If we consider the alternative explanation, -that these negative imputation credit year balances are because of tax refunds- that would be consistent with Spark continually overpaying tax, and so requiring a refund in the following year. You have already told us Ferg that for your own clients, you do not recommend such behaviour.



I work with clients in such a way that we do not prepay tax unnecessarily and secondly, I made the unstated assumption that it usually not good business practice or effective use of cash to pay tax when you don't need to. I guess my bias was showing.


I would call your 'bias' good business practice. So why would you expect the big wigs in Spark's accounting team to overpay their tax for so many years in a row?

I imagine this might happen if there was a general trend of decreasing profits. But that is far from clear in the above table. In fact if you look at 'the management comment on profits' (this is how I think of the dividend), this has increased every year. IOW management are planning on increasing underlying profits year on year. And that attitude is not consistent with perpetually underpaying Spark income tax.

OTOH, and this is particularly obvious in the last two years, the fully imputed dividends paid have significantly exceeded the declared net profit over the past two years. And we know for a fact that as at 30-06-2020, the imputation credit balance was nil. So where have the extra earnings to pay those fully imputed dividends come from? Maybe if the hat from which magic profits are drawn is empty, Spark have just topped up their imputation credit account with shareholder capital?



I'm aware someone posted previously that the imputation credit balances are worked to 31 March each year, but that is not the same thing as the tax filing period with the IRD.


I am not sure what you are getting at with the above comment. You are hinting that you believe that the reporting financial year and the tax financial year for Spark do align (say on 30th June)? But you are also saying that the tax filing period may be on a different date (say 31st March the following year)? If I accept what you saying it sounds like your point is a technical one. Becasue if the tax filing date differs from the company end of year reporting date and the tax reporting date, does not that still means there is a date mismatch between when the tax bill is due and when the financial position is reported?

SNOOPY

[676767]

Fair call. No I don't know if the Spark tax year ends on 31st March. I formed this opinion after the following exchange on this thread: Posts 1823, 1824, 1825 and 1826



From memory, as we do some work with them. EOFY is late June for Spark

[Snoopy]

From memory, as we do some work with them. EOFY is late June for Spark

Yes 30th June is the end of the 'reporting year' for Spark. But is 30th June also the end of the 'tax reporting year'? That is the question. And does it even matter if the 'reporting year' and the 'tax reporting year' end on the same or different dates, if the 'tax filing period' can end on a third different date?

SNOOPY

[JeffW]

Yes 30th June is the end of the 'reporting year' for Spark. But is 30th June also the end of the 'tax reporting year'? That is the question. And does it even matter if the 'reporting year' and the 'tax reporting year' end on the same or different dates, if the 'tax filing period' can end on a third different date?

SNOOPY

Almost certainly the tax year will be 30 June as well. I'd be very surprised if it wasn't

[BlackPeter]

Yes 30th June is the end of the 'reporting year' for Spark. But is 30th June also the end of the 'tax reporting year'? That is the question. And does it even matter if the 'reporting year' and the 'tax reporting year' end on the same or different dates, if the 'tax filing period' can end on a third different date?

SNOOPY

To be honest ... most of Ferg's as well as your recent posts went ways deeper than I might be equipped and would want to dig related to tax accounting ... so maybe we take a brief step back to look at the bigger picture.

If I understand correctly, then you are saying that you think that Spark paid some of its taxes in advance (though we are not sure, given that we don't seem to know what Sparks tax years seems to be).

My question is - why would that matter? I guess if they paid their taxes too late (or not at all), than this would be a concern for share holders (particularly if IRD notices this as well), but otherwise - why do you keep digging?

As well - if this is of interest ... have you tried to talk with Sparks Investor Relations Management? They might be quite happy to clarify the mystery.

[Snoopy]

OTOH, and this is particularly obvious in the last two years, the fully imputed dividends paid have significantly exceeded the declared net profit over the past two years. And we know for a fact that as at 30-06-2020, the imputation credit balance was nil/. So where have the extra earnings to pay those fully imputed dividends come from? Maybe if the hat from which magic profits are drawn is empty, Spark have just topped up their imputation credit account with shareholder capital?


One more piece of evidence on Sparks future thinking regarding dividends comes from the very last question asked at the Spark 2024 to 2026 strategy presentation.



The following is my summary of the Q&A session, complete with the timing when each question was asked..

https://edge.media-server.com/mmc/p/mnjnxvwk

2:20:15
Q/ Dividend imputation guidance over the next three years?
A/ Dividend guidance is given annually. But Spark's aspiration is to grow the dividend over time and the ambition is to have that fully imputed.


I thought the tone of that answer was unusual. Why did Stefan Knight, the finance director, not just say:
"Our ambition is to increase profits, and we will pay fully imputed dividends as those profits allow."

The way Stefan separated 'aspiration ' and 'ambition', I took it to mean that if 'aspiration' to increase profits is not fulfilled then the 'ambition' of having a fully imputed dividend can be met anyway (by topping up the imputation account at the IRD) despite the lack of earnings.

Spark have not admitted to doing this over FY2021 or FY2022. But for how long can fully imputed dividends exceed NPAT earnings if Spark are not doing this?

SNOOPY

[BlackPeter]

One more piece of evidence on Sparks future thinking regarding dividends comes from the very last question asked at the Spark 2024 to 2026 strategy presentation.



I thought the tone of that answer was unusual. Why did Stefan Knight, the finance director, not just say:
"Our ambition is to increase profits, and we will pay fully imputed dividends as those profits allow."

The way Stefan separated 'aspiration ' and 'ambition', I took it to mean that if 'aspiration' to increase profits is not fulfilled then the 'ambition' of having a fully imputed dividend can be met anyway (by topping up the imputation account at the IRD) despite the lack of earnings.

Spark have not admitted to doing this over FY2021 or FY2022. But for how long can fully imputed dividends exceed NPAT earnings if Spark are not doing this?

SNOOPY

OK, cheers - get it. So - are you saying you expect Sparks dividend to come down over the years to come?

This clearly would be a concern for holders of an already overpriced stock, looking at a quite high PE (long time avg around 24), minimal growth rates (low single digits) and minimal NTA).

Dividend trap?

[Snoopy]

OK, cheers - get it. So - are you saying you expect Spark's dividend to come down over the years to come?


To repeat your own life lesson you have retorted more than once to us on this forum BP:
"Accurate predictions are a difficult thing to make, especially about the future."

I am seeing a shortfall with the imputation credits earned compared with the imputation credits paid out. Make of that what you will.

I am also seeing a disconnect between 'profit growth' and 'dividend growth'. The dividend goes up and up, and is now fully imputed no less. But the profit looks pretty close to flat lining, at a level 10-20% below the dividend level (Refer post 2002) . Yet I have to acknowledge that management know a lot more about the future prospects of Spark than I do.

It could be, for example, that when the Takanini data-centre expansion comes on line, Spark will get a sudden boost in profit from what has been -until now- a sunk capital expansion cost. Management recognise this, so feel confident a jump in profit is 'baked in' despite the actual profit for FY2022 being flattish. However, Spark doesn't particularly need cash in the meantime. So if they are paying a 'fully imputed dividend' (artificially inflated by a capital top up), they are effectively dishing out a 'dividend in advance' of their expansion coming to fruition. Next year the jump of earnings will be real, so there will be no need to repeat a 'capital top up' to that imputation credit account to ensure the dividend was fully imputed (if indeed such a top up ever happened).

Nevertheless, if you have been reading this thread of late, you will have learned that there is plenty of competition in the data-centre space. So how sticky will any uptick in earnings be? If we retreat back to a dividend level that matches net profit today, I would say the Spark share price might settle back down towards the $4 mark. Therein lies the 'investment risk' of owning Spark shares, priced on the market at nearer $5 today.



This clearly would be a concern for holders of an already overpriced stock, looking at a quite high PE (long time avg around 24), minimal growth rates (low single digits) and minimal NTA).


I wouldn't get too hung up on the NTA. The intangibles, like being the incumbent market leader, and being a 'cool brand' again, courtesy of market repositioning from 'Telecom' to 'Spark' (and 'Skinny') are, I feel, more important than tangible assets. Finally having personally dealt with all three of the big retail telecommunications players in NZ (the other two being 'One--ex-Vodafone', and 2 Degrees), I think Spark gives the best customer service of the three.

I guess I would class myself as a 'satisfied Spark customer'. I always feel good about investing in firms that I have had good personal service from. But 'feeling good' is not an excuse 'to pay too much'.

Is Spark overpriced at around $5? If they can maintain -or even grow- their dividend, then probably not.

As for being a company with 'minimal growth rates', I would suggest it is better in this case to look at the 'sum of the parts' rather than viewing Spark as a collective. I did this in this post -1812- which I quote from eighteen months ago.



The bare earnings numbers and history as a default necessary service provider lead to the impression of a 'steady as she goes' giant - I agree. But look at what has happened to the revenue break down over the five reporting years under review.



Product Category
Operating Revenue (FY2021)
Operating Revenue (FY2017)
Change
Change Percentage

?
Mobile
$1,311m
$1,197m?
+$114m


+9.5%


Voice
$308m
$655m
-$347mto
-47%


Broadband
$670m
$689m
-$19m
-2.8%


Cloud, Security & Service Management
$443m
$324m
+$119m
+36.7%


Procurement and partners
$414m
$345m
+$69m
+20.0%


Managed Data, Networks & Services
$282m
$207m
+$75m
+36.2%


Other Operating Revenues
$137m
$116m
+$21m
+18.1%


Total External Revenues
$3,565m
$3,533m


Total Absolute Value of Changes


$764m



Something that struck me about this table was the broadband revenue decreasing! This is partly explained by the reclassification of some earnings. From p9 of "Updates to External Reporting" document issued in December 2018.

"To provide a clearer view of broadband and managed data performance, revenues associated with managed internet services have been moved from broadband revenue to managed data revenue."

For the FY2018, year this policy change reduced broadband revenue from $685m to $665m. Concomitant with that, Managed Data, Networks & Services revenue increased from $190m to $207m. Yet even with that adjustment broadband revenue was flat. An example of customers expecting more and more for the same price?

$764m/$3,565m = 21%

That is a measure of how much the business has changed in five years. Although overall revenue has barely changed, more than one in five dollars taken in has shifted to a different product category. I would suggest that is rather a large operational change. In fact I would struggle to think of any other NZ business that has transformed this much over the last five years (bar some start ups). Sometimes what you think you see, a boring steady dividend payer, is not a boring as you think it is.


I regard analysing Spark as an exercise in matching up the growth initiatives against the 'growth lost' in declining market segments. The hope being that when the 'declining bit' stops going down, Spark will transition to become a growth company.

SNOOPY

[Snoopy]

Yes 30th June is the end of the 'reporting year' for Spark. But is 30th June also the end of the 'tax reporting year'? That is the question. And does it even matter if the 'reporting year' and the 'tax reporting year' end on the same or different dates, if the 'tax filing period' can end on a third different date?



Almost certainly the tax year will be 30 June as well. I'd be very surprised if it wasn't

I assume what you have said above is nevertheless consistent with what you wrote in post 1824 JeffW (quoted below).



Imputation Credits can run a negative balance at any time APART FROM 31 March of any year, so I doubt that penalty would apply in this instance - more likely, Imputation Credits attached to dividends prior to the payment of a known liability. It's fairly common practice.


IOW notwithstanding that the tax year and reporting year for Spark are the same date, a known liability in a future period can cause negative imputation credits in a prior period?

SNOOPY

[Ferg]

I can see where you are heading with this but sometimes one needs to "zoom out" if you can't get the details to work.

Regarding tax amounts receivable and negative imputation credits: these can be an entirely normal phenomena as I am about to explain and not necessarily anything sinister.

Some corporates are in multi-year income tax assessment disputes with the IRD. This can result in a reassessment of a prior year tax bill (or multiple tax years) to a figure lower than previously assessed and paid. The original higher tax assessment will have been paid already. So the reassessment will result in a refund due to be paid to the taxpayer, and that amount will appear as a receivable once Spark make the necessary adjustment to their books. That refund may be slow in arriving from the IRD for whatever reason, and so the amount remains as 'tax receivable' in the books as at the reporting period.

Then in the subsequent period, Spark pay their normal income taxes and pay their dividends and whammo they unexpectedly receive the tax refund from that old dispute. They thought they were good with the ICA account, but tax refunds are DEDUCTED from the ICA account which could result in a negative balance. This can happen.

BTW: with an earlier query you substituted 'tax filing period' with 'tax filing date' which completely changed the meaning and you ended up down an irrelevant rabbit hole. Basically I was saying what JeffW said given 'tax filing period' is synonymous with 'tax year' in tax agency circles.

[Snoopy]

As well - if this is of interest ... have you tried to talk with Sparks Investor Relations Management? They might be quite happy to clarify the mystery.

Brrrp brrrp "Hello Spark Investor Relations team"

"Hi, Snoopy here from the renegade Sharetrader stock market discussion forum." "I would like to discuss your fraudulent use of negative imputation credits in the annual accounts."

Click, clock

"Hello, hello, is anyone still there?"

SNOOPY

[Snoopy]

BTW: with an earlier query you substituted 'tax filing period' with 'tax filing date' which completely changed the meaning and you ended up down an irrelevant rabbit hole. Basically I was saying what JeffW said given 'tax filing period' is synonymous with 'tax year' in tax agency circles.


I apologize for playing fast and loose with the lingo. I realise that in a technical area such as tax, it is important to get the language right, and meanings can backfire if you don't know the precise language (which I don't). So to summise what I think I know:

1/ We have the 'company reporting period' which is chosen by the company. In the case of Spark it ends on the 30th June each year, and comprises the preceding twelve months.
2/ We have the 'taxation reporting period', which for practical purposes is normally the same as the 'company reporting period'.
3/ We have the 'tax filing period' which is always based around the 12 months ending 31st March.
4/ We have the 'tax filing date' which for an entity with a 'taxation reporting period' ending on 31st March is a single date, the 7th of July.

Reporting issues can complicate when a tax payment for a certain 'tax filing period' falls outside the 'tax reporting period' in what is ostensibly the same financial year. In the case of a company with a 'taxation reporting period' ending 30th June, reporting complications will occur for any tax payments paid in the period from 1st July and ending on 31st the following calendar year.

I hope I have that right now. Please correct me if I haven't!

SNOOPY

[Snoopy]

I can see where you are heading with this but sometimes one needs to "zoom out" if you can't get the details to work.

Regarding tax amounts receivable and negative imputation credits: these can be an entirely normal phenomena as I am about to explain and not necessarily anything sinister.

Some corporates are in multi-year income tax assessment disputes with the IRD. This can result in a reassessment of a prior year tax bill (or multiple tax years) to a figure lower than previously assessed and paid. The original higher tax assessment will have been paid already. So the reassessment will result in a refund due to be paid to the taxpayer, and that amount will appear as a receivable once Spark make the necessary adjustment to their books. That refund may be slow in arriving from the IRD for whatever reason, and so the amount remains as 'tax receivable' in the books as at the reporting period. Then in the subsequent period, Spark pay their normal income taxes and pay their dividends and whammo they unexpectedly receive the tax refund from that old dispute. They thought they were good with the ICA account, but tax refunds are DEDUCTED from the ICA account which could result in a negative balance. This can happen.


I fully appreciate what you are telling me here Ferg. This may indeed be what happened. But the next step is to line up all possible explanations and evaluate the likelihood of each.

If you go back to my post 2043, you will see that profit dropped substantially from FY2014 ($460m) to FY2015 ($375m). If provisional tax for FY2015 was based FY2014 earnings (quite likely) it would be no surprise that come the end of the FY2015 year, Spark may have paid too much income tax. The +$30m in the Imputation Credit account at EOFY2015 is consistent with this. Nothing unusual is needed to explain it. This is the normal way the tax system works.

Next we move into the era of 'negative imputation credits', starting at EOFY2016. Now let's assume that first negative I/C balance year was a result of a tax dispute and refund much as you described Ferg. Then there was another little tax issue in the year after that, and the year after that as well and the next year and......

I hope you can see where I am going with this. Why is a relatively stable earner that has not changed their operational profit level that much from year to year suddenly having all of these tax reconciliation problems? FY2014 and FY2015 looked to be percolating along nicely from a tax perspective, just as you might expect, before the wheels started falling off. The more problems that Spark is 'apparently working through' in a row, reconciling tax assessment and reconciliation refund issues, the less plausible this explanation becomes (in my eyes at least).

This brings me back to my post 2032, looking at the balance between imputation credits earned and imputation credits paid out. This works fine, provided the fourth dividend in the two year period, paid in April, is pushed out into the 'tax filing period' ending on 31st March the following year. No special assumptions on ongoing disputes are needed. And the fact that the negative imputation credit is an 'annual issue', ties in with the annual payment of the interim dividend every year in April. I could still be wrong. But this does seem a much simpler explanation as to how that imputation credit account 'apparently' went negative (I would argue that due to payment timing issues in the real world it didn't). And "I can get the details to work!"

SNOOPY

[JeffW]

I assume what you have said above is nevertheless consistent with what you wrote in post 1824 JeffW (quoted below).



IOW notwithstanding that the tax year and reporting year for Spark are the same date, a known liability in a future period can cause negative imputation credits in a prior period?



SNOOPY

For clarity, the annual reporting balance date and tax balance date are almost invariably the same. However, the Imputation Year is always 31 March, irrespective of balance date. The imputation account can be negative at any time without penalty other than at 31 March or each year

[Snoopy]

First, an apology. It looks like I wrote the equivalent of a short story about Spark over 2021 and never penned the final chapter! This post is the missing 'summary post' for my previous posts 1806, 1807, 1609 and 1810 on this thread. With my forum settings, I have to go back 17 pages to find these posts.

Spark fails the Buffett test, because earnings per share were largely flat over the five year period test period (no eps growth). Meanwhile, net profit margin was showing a declining trend, except for a one off 'profit bump' between between FY2018 and FY2019. This was principally due to falling labour costs, the result of both standardization of processes and automation. But it becomes hard to continue such savings year after year.

Failing the Buffett test does not necessarily mean that Spark is a poor investment though. It just means that we need to look at the investment under different valuation models. If we assume that Spark is a 'no growth' business over the business cycle, then we can look at 'capitalised dividend valuation' as an investment yardstick. Post 1819 summarizes this, based on a gross yield of 6%. I should add this 'capitalised dividend analysis' was done on 24th August 2021, before the dream of interest rates dropping to a permanently lower notch for the foreseeable future was shattered. The Spark share price was $4.84 on that day. That looked favourable against a $5.58 capitalised dividend valuation.

In the last few days (post 1068) I have redone my 'capitalised dividend valuation' for FY2023 using a gross interest rate of 6.5%. If I had known then what I do now, I would not have dropped my acceptable gross yield down to 6% back in August 2021. Reworking my historical gross yield calculation from post 1819 using today's 6.5% gross yield expectation gives me a revised fair historical 'capitalised dividend value' of:

33.46c/0.065 = $5.15 (on 24-08-2021)

So back on 24th August, that $4.84 market value was still below my 'with hindsight' 'capitalised dividend value' of $5.15. But much of the earlier 'margin of safety' from my post 1819 former valuation of $5.53 was gone. This is a good reason why I would never buy a share at what I deem 'fair value'. I always buy for a purchase price 'below fair value' (10% discount minimum), that will allow for any overoptimism I put into my 'fair value' calculations.

A great advantage of using "capitalised dividend valuation" is that. being a 'zero growth' model, any real growth that does occur, we as investors get 'for free'. This brings me to my post 1811 where I look at the contribution of the growth side of the Spark business: Qrious (data processing and AI) , Internet of Things and Spark Sport. That shows me that for FY2021 these 'growth businesses' delivered $10m to the bottom line from normalised profits of $375m. That works out as 2.66% of profits, which I see as margin of error stuff. (The recent closure of 'Spark Sport' puts a further cloud over Spark's growth ambitions. But this is judging historical growth plans with the benefit of hindsight that was not available 'back in the day'). With the growth engine at Spark not really firing, I would say using a 'capitalised dividend revaluation model' for valuing the Spark share is reasonable.

Despite the failure of Spark to jump all the Buffett test hurdles using a FY2021 perspective, I would say the on market trading price of $4.84 'back in the day' offering a 6% discount on my revised $5.15 'capitalised value' was a fair price. The Spark share back in August 2021 was not a compelling buy. But it was certainly not something a portfolio investor looking for income should be looking to sell either.


This post is a result summary of posts 1806, 1994, 1995 and 1997. These four posts are a good snapshot of the way Warren Buffett might look at Spark as a potential investment, by looking at a previous five year investment review window.

The Good: Spark is in a very strong market position as a top three retailer of fixed line, mobile line (both in voice and data) and ancillary services (BT1). Spark also has a strong return on shareholder equity, consistently around the 25% level (BT3).

The not so Good: A very flat normalised profit over five years (BT2), combined with a very flat normalised profit margin over the same period (BT4).

Good enough?: No. All four Buffett Test boxes must be ticked for a Buffett test pass. Only two were achieved.

The result is a 'test failure' by the Buffett test criteria. The Buffett test numbers are telling me this is a 'no growth company'. But that doesn't mean that Spark is a bad investment for a non-Buffett style investor, when the investment metrics are comsidered in other ways.

----------------

Spark is an efficient provider with a peer beating total shareholder return of 11.7% per year (dividends compounding) over the last three years (Spark PR2022, Slide 27). This return beats all but one of the 14 comparative businesses in the Spark peer group comparison.

My recent capitalised dividend model exercise (post 1968) gives a 'fair value' for Spark of $5.24 (based on a 6.5% averaged gross dividend yield). The share closed at $5.05 on 14-04-2023. The crudeness of the capitalised dividend value technique means that no tertiary trained financial analyst would ever admit to using it. But the fact that it is:
a/ Entirely based on real results , with no fudge factors, AND
b/ It incorporates the company directors view (more reliable than any analyst), on what dividend level is appropriate - irrespective of the declared earnings numbers.

These are the reasons why I think 'capitalised dividend valuation' is such a useful tool, often confirmed by Mr Market's valuation of the same company being not so far away. My existing portfolio holding of Spark certainly paid dividends, both literally and figuratively, on enhancing the value of my NZX investments over tax year FY2023. Or perhaps more correctly meant my portfolio returns were less negative than they otherwise would have been :(. But my valuation does come with a caveat.

Whether you look at Spark earnings 'as declared' or 'normalised', of late, they don't cover the dividends paid out (refer post 2032). Since FY2022, Spark have received a 'capital top up' from the sale of a controlling stake in their cell tower network. So any crack in the balance sheet from what I have termed 'over-payment of dividends' has been filled in. But Spark have more or less reached the end of the road for 'surplus assets to sell'. So my advice to Spark share buyers is to keep a close eye on how well earnings cover dividends going forwards.

On the positive side I am assuming the newly blossoming identification verification SaaS arm - MATTR - has zero value. If this turns out not to be so, then a possible future trade sale, or even a float, of this business would provide a welcome cash bonus for shareholders.

SNOOPY

discl: hold

[Snoopy]

-----------------------

Fixed - Active Wholesale Income

"Data and connectivity revenue decreased reflecting an ongoing S10 reduction in largely low end enterprise grade legacy products, price competition in wideband fibre products and migration of legacy services."

-----------------------

I had no idea what they were talking about last night and I have no idea now. Can anyone out there read 'telespeak'?



Customers are migrating off older, higher priced, slower connections, in favour of newer connections - both offered by spark and competitors, either way resulting in reduced revenue. I don't know what the 'S10' means however


After one false start, an 'S10' might be this device, "connecting IoT devices to the cloud"?
https://www.gl-inet.com/products/gl-s10/

Actually scratch that. I had a look at the text I was quoting again and it said SIO not S10. SIO means 'Services in Operation'. Arrrrgh!

SNOOPY

[percy]

Any one else having trouble with Spark email being down.?

[Mickey]

Hi Percy - they have an issue with their backend systems. It is impacting their website, voicemail services and Xtramail. They posted the following update at 11am: "We are continuing to restore service to our back-end systems. If customers have a medical dependency on their service and require urgent support, they can call us on 123 and press ‘9,’ otherwise we’re asking customers to try calling back later"

[percy]

Hi Percy - they have an issue with their backend systems. It is impacting their website, voicemail services and Xtramail. They posted the following update at 11am: "We are continuing to restore service to our back-end systems. If customers have a medical dependency on their service and require urgent support, they can call us on 123 and press ‘9,’ otherwise we’re asking customers to try calling back later"

Thank you.
I was worried it was just me.?

[bull....]

down for maintenance maybe they could look into there broadband speed as its getting worse by the mth or is it there throttling me ? because there overloaded

[Snoopy]

Thank you.
I was worried it was just me.?

Ducked into the Riccarton shopping mall late this afternoon. The clear sliding doors on the Spark shop were closed with staff on guard and a notice saying 'store closed because of technical communication issues'. It must be some outage!

SNOOPY

[Nor]

their them they're

[percy]

Back up and working.

[Snoopy]

McInsey estimates that the total value captured by by IoT in 2020 ($1.6 trillion), while considerable, is in the lower end of the range of the scenarios mapped out in 2015. By 2030 McInsey estimate value capture with IoT to increase to $5.5 trillion - $12.6 trillion in value globally, including the value captured by consumers and customers of IoT products and services.

McInsey found that the factory setting (which includes standardized production environments in manufacturing, standardised hospital procedures, and other areas) will account for the largest amount of potential economic value from the IoT, around 26 percent, in 2030. In simple terms, optimizing operations in manufacturing—making the various day-to-day management of assets and people more efficient. Manufacturing in this broad sense can include agriculture.

The human-health setting is second, representing around 10 to 14 percent of estimated IoT economic value in 2030. This will start with wearable health devices, like watches, able to check heart rate, ingestible cameras you can swallow so that doctors can get an internal picture of what is going on, and air and environmental sensors. This allows doctors to build better models of disease progression. IoT health revenue is predicted to rise to between $0.5 trillion and $1.8 trillion, by 2030.


I thought this was an interesting application of Spark's promoting of the Internet of Things relating to health. Real time measuring of the health of our city streams.

https://www.sparknz.co.nz/news/iot_sensors_water_quality/

“There is currently up to a two-week delay in between taking manual samples, testing them and responding,” says the Council’s Smart Christchurch Manager Michael Healy.
"What we’re hoping to see from the introduction of Adroit Water Quality Monitoring is the ability to see pollution events unfold in real-time and potentially take preventative action."

SNOOPY

[Snoopy]

As of the end of June 2023, the 0900 service has been discontinued by Spark. Got quite a shock to hear this tonight! Another blow for charity fund raising? A charity I regularly donate to was given two weeks notice that the service was to be discontinued. Seems to have been done quietly and quickly with no publicity.

https://www.spark.co.nz/business/help/other/termsandconditions/0900numbers

SNOOPY

[winner69]

Suppose this is an outstanding result

So many big numbers to comprehend

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/SPF/416561/400646.pdf

[percy]

I am happy with the result and outlook.
Increasing divie too.

[winner69]

Looking forward

F23 EBITDAI $1,193m (adjusted for Towers etc)

F24 guidance $1,215m-$1,260m

Heading in right direction so next year divie might be a fraction higher

[Snoopy]

The following are notes I have taken from the 23 minute point into this podcast,the presentation of the FY2023 results.
https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/audio/Spark_FY23_Financial_Results_Announcement_180823.m p3

Growth cost out of $40m-$60m for FY2024 - What are the details?

Simplification from the exit of legacy 3G and PSTN networks. more automation in network deployment, more customer interactions through digital channels, and driving ownership economics (transferring more of the broadband base onto Spark's own wireless broadband network). Savings will be reinvested into high growth areas, which will help maintain Spark margins (so no 'net' cost out). Growth component of reinvestment $100-$120m for FY2024, slightly more than it has been.

Growth in Mobile Income over FY2023

Of the 9% mobile revenue growth (round figures), 3.3% was in roaming reflecting more people flying into New Zealand by air (returning from near zero to 86% of the previous pre-Covid total) and 4.7% of underlying normal mobile distribution growth. So mobile revenue growth target for FY2024 of 5% is a solid 'steady as she goes' growth forecast for FY2024.

Cashflow Trends

Free cashflow is more weighted to the second half, as Spark sees more capex invested in the first half, and more advertising in handsets and promotions in the run up to Christmas. Hyper-scale investment of $250-$300m related to data-centres is based on 3-5 year trends of what Spark is observing globally. Spark has land available for further development but are also looking at other locations.

Connect8 (in house infrastructure construction unit) going forwards

Will revenues reduce at the end of the current 5G mobile build out plan? Connect8 also cover IT supply and distribution and other non-mobile infrastructure. Growth ahead for Connect8 is looking to be in the low single digit numbers for revenue growth , and EBITDA growth of around 20-30%. Connect8 has now been folded into Spark's 'Enteler Group' subsidiary.

Broadband margins going forwards

Broadband is a very competitive market place. Immigration returning is a tailwind, but CPI pressure is a headwind. Aim is to hold market share and use wireless broadband as the means to maintain Spark's margins. Aim is to grow wireless broadband from 30% to 35% of Spark's broadband base over three years (by FY2026). 5G will continue to help this with the extra capacity it brings to the network. Spark put its prices up by 6% on 1st August on its fibre plans. It is too early to say if this will drive some customers to 'fixed wireless'.

Fate of 'old' IT business, excluding procurement and the Takanini data centre expansion

70% of the IT business is government work, which is a really strong place to be. There will be price pressure ongoing from the likes of private cloud. Price pressure growth will be offset with volume growth. Launching new product into this market, a new hybrid cloud offering, and will be taking some decisive action on the cost base to avoid duplication and are moving more to a volume charging regime more aligned to changing margin profile of the customer base.

Churn in mobile customer base

NZ when looked at in a global context has an excess weighting towards the prepaid area of the market. Customers are 'moving up'. Connections have grown, both among the 'paid monthly' and prepaid base. No increase in customer churn in either area. A desire for more data usage is pushing people up into different plans. There is an underlying trend of people moving onto monthly plans and annual price increases have not affected that.

Data Centre Growth Forecast

9-10% profit growth once investments are at scale. Interim incremental return on the path will be less, as most of the investment must be made 'up front' first. Returns come on line as the capacity comes on line.

Tax Losses in Australia?

Can they be used? Connect8 transaction and Spark Sport have reduced the tax bill over FY2023. Adjust for those and tax normalises to about 29%. (Specific question on Australian tax recovery taken off line).

SNOOPY

[Ricky-bobby]

Thanks snoopy! so nothing ground breaking, just steady as she goes

[Snoopy]

Buffett Test 1 may be found in post 1806. Not enough has changed year to year to warrant me rewriting it. So we are straight into Buffett Test 2.

eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)



FY2018:($365m - 0.72($10m) )/1835m = 19.5cps


FY2019:($409m - 0.72($15m) )/1836m = 21.7cps


FY2020:($427m - 0.72($35m-$2m) - $10m -$7m)/1837m = 21.0cps


FY2021:($384m - 0.72($28m - $16m) ) /1867m = 20.1cps


FY2022:($410m - 0.72($26m) ) /1872m = 20.9cps



Notes

1/ Figures for FY2018 are derived from the re-reported profit figures as presented in the December 4th 2018 Analysts Briefing, titled 'Updates to External Reporting'. These updates alter the financial reporting for the FY2018 year as though the subsequently applied new accounting standards NZ IFRS15 (on apportioning revenues and costs) and NZ IFRS16 (on the balance sheet representation of leases) were already in force over FY2018. Doing this means that all calculated results are compared under the same set of accounting standards.

2/ For FY2018, I have removed the $10m of profit resulting from a 50% sale of formerly 100% owned subsidiary 'Connect 8 Limited' (an infrastructure civil construction business).

3/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

4/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this with $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

5/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of historic wire and maintenance charges that was charged to some fibre broadband customers.

6/ For FY2022 I have removed $26m of 'other gains' (that includes $10m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $16m from a gain on lease modifications and terminations)

Conclusion: Average normalised earnings over the past five years was 20.6cps (the same as FY2021). The high of 21.7cps was 5% higher than average and the low of 19.5cps was 5% less than the average. This is just about as flat as corporate earnings get in the real world. Next a review on input costs.




Financial YearLabour ExpenseFinance Expense


2018$513m$77m


2019$475m$85m


2020$511m$94m


2021$491m$81m


2022$495m$74m



The table above shows labour expenses have been held down, and interest costs are at cyclical lows. But I would expect upward pressure on both these cost staples as we look to FY2023. Growth initiative research (post 1982) does not give any hint of a significant boost in top line revenue going forwards. Nevertheless mobile service revenue growth continues to exceed expectations, which largely covers the 'new class' growth initiatives and cloud services not performing to expectations

Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless this is the case. But it is clear there is no clear historical pattern of increasing earnings per share here.

Conclusion: Fail test.



Buffett Test 1 may be found in post 1806.
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=901658&viewfull=1#post901658

Not enough has changed year to year to warrant me rewriting it. So we are straight into Buffett Test 2.

eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)



FY2019:($409m - 0.72($15m) )/1836m = 21.7cps


FY2020:($427m - 0.72($35m-$2m) - $10m -$7m)/1837m = 21.0cps


FY2021:($384m - 0.72($28m - $16m) ) /1867m = 20.1cps


FY2022:($410m - 0.72($26m) ) /1872m = 20.9cps


FY2023:( 0.72x($1152m-($583m-$54m)) - 0.72($33m) )/1845m = 23.0cps



Notes

1/ For FY2019 I have removed from profit $2m from the sale of a long term investment/business, $11m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations, making a grand total of $15m to be adjusted for.

2/ For FY2020 I have removed $35m of 'other gains' (that includes $5m from the sale of a long term investment or former subsidiary, $28m from the sale of Property Plant and Equipment and $2m from a gain on lease modifications and terminations). I have offset this against $2m of rent concessions that would not have been granted outside of a Covid-19 environment. Furthermore I have removed a one off $10m downward adjustment to the tax bill that was a result of a law change reinstating the depreciation allowance on commercial buildings. Finally I have brought in a retrospective adjustment of $7m from FY2021. This adjustment relates to "reflect a reduction in net earnings of $7 million for the amortisation of reacquired rights that were previously regarded as indefinite life and therefore not amortised."

3/ For FY2021 I have removed $28m of 'other gains' (that includes $1m from the sale of a minority shareholding in long term investment 'Now New Zealand' (a boutique broadband retailer), $9m from the sale of Property Plant and Equipment (primarily mobile plant and equipment) and $18m from a gain on lease modifications and terminations). I have offset this against a one off refund of $16m of 'wire and maintenance' charges, that were wrongly charged to some fibre broadband and wireless customers.

4/ For FY2022 I have removed $26m of 'other gains' (that includes $10m from the sale of Property Plant and Equipment (primarily mobile plant and equipment)) and $16m from a gain on lease modifications and terminations.

5/ For FY2023 I have removed the one off gain from selling 'Towerco' (now Connexa) of $583m and the one off loss of shutting down Spark Sport of $54m. Furthermore the $20m gained from selling property plant and equipment (primarily mobile network equipment) and the $13m gained on lease modifications and terminations have been removed (for a sub-total of $33m) .

-----------------------

The number of shares on issue during the year have reduced as a result of a share buyback, which commenced on 6th April 2023. The company is planning to spend up to $350m 'on market' buying back and cancelling its own shares. The money for the buyback is coming from the proceeds of the Towerco/Connexa sell down. If the average buyback price ends up being $5 per share (the buyback campaign continued after the balance date and continues today) then 70m shares will end up being bought back by the time the buyback runs out of purchasing authority. As at 30th June 2023, $146m had been spent on the buyback, a total from which we remove $4m, because of new shares issued under share schemes during the financial year. The net $142m worth of money spent on a net 27m of shares bought back represents an average purchase buyback share price over the 30th June 2023 financial year of: $142m/27m = $5.26.

Average normalised earnings over the past five years was 21.3cps. The 2023 result marked the first 'green shoot' of a possible uptrend. But in reality it is no more than the right hand tip of a U shaped profit picture. It will take until next year too see if our evolving picture will be seen in a 'better light' and paint a picture of consistent eps growth.



Financial YearLabour ExpenseFinance Expense


2019$475m$85m


2020$511m$94m


2021$491m$81m


2022$495m$74m


2023$511m$99m



The table above shows labour expenses are on the rise again , and interest costs are up sharply from their cyclical lows. The upward pressure on both I forecast from last year is here! Mobile service revenue growth continues to exceed expectations, rising an impressive $120m over the year and more than offsetting the aforementioned price increases. The growth in mobile revenue largely covers the 'new class' growth initiatives and cloud services not performing to expectations as well.

Looking at the trend in the last five years of earnings, as used in the 'Buffett Model', is meant to be the indicator of whether a company is able to continue positive 'eps' growth into the future. The spreadsheet part of the Buffett valuation model does not work unless there is a positive trend of 'eps' growth. But it is clear there is no clear historical pattern of increasing earnings per share here, yet.

Conclusion: Fail test.

SNOOPY

[Snoopy]

ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2018: $358m / $1,483m = 24.1%
FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%
FY2022: $397m / $1,475m = 26.9%

Conclusion: Pass Test




ROE= (Normalised earnings) / (Shareholder Equity EOFY)

FY2019: $398m / $1,465m = 27.2%
FY2020: $386m / $1,493m = 25.9%
FY2021: $375m / $1,503m = 25.0%
FY2022: $397m / $1,475m = 26.9%
FY2023: $425m / $1,940m(1) = 21.9%

Notes

1/ The sell down of Spark's 'Towerco' business was completed on 14th October 2022 for a gain of $583m. But some of this capital profit was eroded by a $54m write down from the closing of Spark Sport. The net $465m of new equity on the books over FY2023 can largely be attributed to these two large adjustments to the company capital base.

Conclusion: Pass Test

SNOOPY

[Snoopy]

Net Profit Margin = (Normalised Profit) / (Operating Revenue)



FY2018: $358m / ($3,533m - $10m) = 10.2%


FY2019: $398m / $3,518m = 11.3%


FY2020: $386m / $3,588m = 10.8%


FY2021: $375m / $3,565m = 10.5%


FY2022: $397m / $3,694m = 10.7%



Notes

1/ Turnover across FY2018 has had revenue from asset sales removed from the revenue total.
2/ Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020, FY2021 and FY2022.

-------------------------

How much do the level of interest rates affect normalised profit? I don't normalise for those! But I do note that while the interest payments on debt have decreased year on year ($81m -> $74m), the amount of capital borrowed has increased ($1,403m -> $1,526m) (see AR2022 p108)! And this in spite of Foreign Currency Medium Term currency borrowing going down on paper (in fact the FMTNs have not changed in their home currency - this is a snapshot NZD exchange rate effect.) The increase in debt is termed a 'temporary working capital impact' (PR2022, slide 22) .

One reason for the interest paid drop is the switch to new lower rate 'green bond (sustainability related)' funding ($365m dollars worth). This replaced the $160m of borrowings formerly taken out with the Hong Kong and Shanghai bank and Mitsubishi UFU Financial Group Bank. (I believe this $200m jump in overall debt will be reversed when a 'planned surplus' of $200m is banked from the TowerCo proceeds.)

Short term debt (due within 12 months), -mostly on variable interest rates-, represents $293m/ $1,526m = 19.2% of the total (down from 26.6% in the previous year). If short term debt rates rise an incremental 2 percentage points, this will increase the company interest bill by: 0.02 x $293m = $5.9m. That is back to where the interest bill was at EOFY2021, so not a massive deal. And I haven't adjusted that figure for the $200m reduction in debt, once the TowerCo surplus proceeds are absorbed.

Of course, all this excludes the effect of 'lease interest' due on the sale and leaseback of Spark's network cellphone towers to 'TowerCo'. I would regard such money as a 'network running expense', rather than a true finance cost.

In summary, you don't need a mathematicians eye to describe the profit margin history of this company. It is flat.

Conclusion: Fail test



Net Profit Margin = (Normalised Profit) / (Operating Revenue)



FY2019: $398m / $3,518m = 11.3%


FY2020: $386m / $3,588m = 10.8%


FY2021: $375m / $3,565m = 10.5%


FY2022: $397m / $3,694m = 10.7%


FY2023: $425m / $3,875m = 11.0%



Notes

1/ / Turnover from asset sales is not included in the revenue that I have quoted for FY2019, FY2020, FY2021 FY2022 and FY2023 (See note 2.2 in the respective annual reports on operating revenues) .

-------------------------

Round all the above numbers to 2 significant figures and the net profit margin has been stuck on 11% for the last five years. In the real world, this is about as consistent as results ever get! 11% is quote a good net profit margin, but where is the ability to grow that figure shown here? Answer: It isn't.

Conclusion: Fail test

SNOOPY

[Snoopy]

Gross Dividend Calculations

FY2019P1, FY2019P2, FY2020 P1, FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1, FY2022P2, FY2023 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)

FY2023 P2: (this dividend not yet paid at time of posting)
13.5c (Ordinary, 100% imputed) = 13.5c (FI) = 13.5c/0.72 = 18.75c = 18.75c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY201912.5c + 12.5c16.15c + 16.15c32.30c


FY202012.5c + 12.5c16.15c + 16.15c32.30c


FY202112.5c + 12.5c17.36c + 17.36c34.72c


FY202212.5c + 12.5c17.36c + 17.36c34.72c


FY202312.5c + 13.5c17.36c + 18.75c36.11c


Total170.15c



Now we come to selecting the capitalisation rate in this ultra low interest rate environment. I have selected a figure of 5% for Chorus (from a March2021 low interest rate perspective). But Chorus is a regulated monopoly. I think Spark shareholders need a greater implied return than that, to compensate for the risks of competition and technological change. I think a 6.5% gross interest return on your shares bought, in today's rising interest rate environment, would be fair. The five year historical average gross dividend received by shareholders FY202312.5c + 13.5c17.36c + 18.75c36.11cfrom Spark was:

170.15 / 5 = 34.03c

The capitalised dividend value of Spark (fair value) is therefore: 34.03c/0.065 = $5.24

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.24 x 0.9 = $4.72.

discl: holder, but have not purchased recently.



Gross Dividend Calculations

FY2019P2, FY2020 P1, FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1, FY2022P2, FY2023 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)

FY2023 P2, FY2024 P1:
13.5c (Ordinary, 100% imputed) = 13.5c (FI) = 13.5c/0.72 = 18.75c = 18.75c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY201912.5c + 12.5c16.15c + 16.15c16.15c


FY202012.5c + 12.5c16.15c + 16.15c32.30c


FY202112.5c + 12.5c17.36c + 17.36c34.72c


FY202212.5c + 12.5c17.36c + 17.36c34.72c


FY202312.5c + 13.5c17.36c + 18.75c36.11c


FY202413.5c + ?c18.75c + ?c18.75c


Total172.75c



Now we come to selecting the capitalisation rate. Spark Bonds (SPF570 and SPF580) are currently trading in the secondary market at yields of around 6%. I think Spark shareholders need a greater implied return than that, to compensate for the risks equity ownership. Having said that, from an operational perspective Spark is a very stable company. So I think a 6.5% gross interest return on your shares bought, in today's high interest rate environment, would still be fair. The five year historical average gross dividend received by shareholders from Spark was:

172.75 / 5 = 34.55c

The capitalised dividend value of Spark (fair value) is therefore: 34.55c/0.065 = $5.32

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.32 x 0.9 = $4.78. With the share closing at $4.74 on Friday, did I just 'ring the bell'?

SNOOPY

[Snoopy]

I am looking at this from another angle, starting with 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A Nil imputation credit balance means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the two year period following EOFY2020, what fully imputed dividends were paid out?



Dividends Paid FY2021 & FY2022Gross DividendNet DividendImputation Credits


Second HY dividend FY2020$319.4m$230m$89.4m


First HY dividend FY2021$320.8m$231m$89.8m


Second HY dividend FY2021$323.6m$233m$90.6m


First HY dividend FY2022$325.0m$234m$91.0m


Total$360.8m



Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



-------------------------

Now, how does that $360.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:



Income Tax paid over FY2021$188m


Income Tax paid over FY2022$160m


Imputation Credit Balance Owing EOFY2022$16m(See AR2022 p120)


Total$364m



This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $16m of imputation credits owing! But as nztx pointed out in post 2004, the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year, and the Spark tax financial year that ends 9 months later. That means the unpaid imputation credit balance of $16m is actually an accounting construct, caused by Spark choosing to put a line under their year at 30th June, while the same $16m is a bill 'not yet due' from an IRD perspective.



A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A Nil imputation credit balance means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the three year period following EOFY2020, what fully imputed dividends were paid out?



Dividends Paid FY2021 & FY2022Gross DividendNet DividendImputation Credits


Second HY dividend FY2020$319.4m$230m$89.4m


First HY dividend FY2021$320.8m$231m$89.8m


Second HY dividend FY2021$323.6m$233m$90.6m


First HY dividend FY2022$325.0m$234m$91.0m


Second HY dividend FY2022$325.0m$234m$91.0m


First HY dividend FY2023$325.0m$234m$91.0m


Total$542.8m



Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



-------------------------

Now, how does that $542.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:



Income Tax paid over FY2021$188m


Income Tax paid over FY2022$160m


Income Tax paid over FY2023$190m


Imputation Credit Balance Owing EOFY2023$32m(See AR2023, p131)


Total$570m



This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $32m of imputation credits owing! But the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year (30th June) , and the Spark tax financial year that ends 9 months later (31st of March of the following year). That means the unpaid imputation credit balance of $32m is actually an accounting construct, caused by Spark choosing to put a line under their year at the end of 30th June, while the same $32m is a bill 'not yet due' from an IRD perspective.

There is a reported deficit on income tax credits, - which is odd in itself as I was under the impression that income tax credits could not be issued to shareholders until the underlying tax bill was paid (does this mean that the negative imputation credit balance as at 30th June was brought up to zero 'and then some' ($32m+$91m= $123m) before the payment of the final dividend in October, despite the negative imputation credit balance payment not being required to be paid by the IRD until 31st March the following year? - I guess it does!) So does all of this line up with the income tax payments expected to the IRD as reported to the half year ended 31st December 2022 (EOHY2023)? 'Kind of' - the half year cashflow statement shows income tax payments to the IRD of $120m over that period. That means the income tax payment by the final dividend payment date looks to have been $3m shy.

SNOOPY

[Snoopy]

So far so good. But what about the company earnings that were used to pay these dividends quoted in my 'post 2077'?

This is a post about:
i/ Underlying taxable earnings COMPARED WITH
ii/ Declared taxable earnings AND the ability to skirt around the difference using
iii/ The Company Balance Sheet

-----------------------------------------------------------------------------------------------------


i/ From the "Reconciliation of Income tax expense" AR section 6.1"


Underlying Taxable EarningsGross EarningsNet Earnings
Imputation CreditsReference


FY2021$553m$398m
$155m
AR2021 p100


FY2022$581m$418m
$163mAR2022 p119


FY2023 (1)($1152m-($583m(2)-$54m(2)+$5m(2)-$30m(4) ))$433m
($323m-$168m(3) )AR2023 p130


Total$1,722m$473m



Notes

1i/ $1,152m -($583m -$54m+$5m) -$30m = $588m,
1ii/ $323m-$168m= $155m.
1iii/ The number in red is calculated ('Gross earnings'-'Imputation Credits'). However, this calculated figure happens to agree with 'adjusted net earnings; figure printed on p103 in AR2023.
2/ Net gain on the sell down of Connexia ($583m profit) AND the loss on the closing of Spark Sport ($54m loss) AND the subsequent revaluation upwards of the stake in Connexa following the Connexa 2 degrees transaction ($5m profit) may be found in AR2023 on p103. These are 'one offs', not underlying earnings.
3/ Tax effect of Connexa sale, Spark Sport write down and the subsequent dilution effect from the 2 degrees towers being folded into Connexa, diluting the Connexa holding of Spark (AR2023 p103) but also modestly increasing the value of that stake.
4/ One off costs associated with the one off transactions mentioned in note 3 may be found in AR2023 p130 under sub note 1 (under 'income tax expense' header). These amount to a total of $30m:
"$26m for the costs associated with the assets disposed of in the sale of Connexa, $2m for the unwinding of a deferred tax asset associated with the Connexa transaction and $2m of current tax adjustment for the Spark Sport provision.

---------------------------

Note that the implied rolling three year underlying tax rate average, as laid out in the above table, is $473m/$1,722m = 28%

Below is fundamentally the same information, but this time expressed in the form of declared earnings and actual tax paid.

--------------------------------------------------------------------------------------------------------

ii/ From the "Statement of profit or loss and other comprehensive income" in the respective AR


Declared EarningsGross EarningsNet Earnings
Imputation CreditsReference


FY2021$553m$384m
$169m
AR2021 p62


FY2022$581m$410m
$171mAR2022 p79


FY2023$1,152m$1,135m
$17mAR2023 p89


Total$2,286m$357m



The implied tax rate on disclosed earnings overall is $357m/$2,286m= 15.6%

This shows a lower tax rate than the company tax rate of 28%. Why is the declared tax so much less than than the underlying tax?

a/ A large proportion of 'declared earnings' from FY2023 are non-taxable net capital profits, the result of the mobile towers sale.
b/ At balance date, Spark had a negative imputation credit balance of $32m (Ar2023 p131). This $32m represents a 'timing of payments' issue, not a tax bill that has been escaped. The 30th June Spark reporting date creates a 'reporting reference point', where tax due on the following 31st March -must be recognised- on the Spark balance sheet as a 'tax bill', nine months prior to the IRD recognised due date on the following 31st March.
c/ The sale of mobile tower assets resulted in the concomitant creation of new 'lease liabilities' and 'right of use assets' on the Spark balance sheet. These balance sheet additions are the result of Spark entering into leaseback contracts with the new, now equity accounted, tower owning company Connexa. I confess that I do not fully understand the tax implications of this. But looking at the balance sheet, the company has gone from holding $108m of deferred tax liabilities to holding $55m of deferred tax assets, a turnaround of $163m in the deferred tax position between EOFY2022 and EOFY2023. I can cross reference that $163m figure against the disclosure notes on income tax expense (AR2023 p130), which I detail in the next paragraph.

From the disclosure notes, I can see deferred tax adjustments totalling $24m+$137m+$3m (a sum total of $164m, reducing the 'current year tax obligation' by $164m). Co-incidence (I am assuming the $1m difference between $163m and $164m is a rounding error)? If not a co-incidence, it looks to me as though the Connexa transaction of selling and leasing back what were your own company owned cell towers has given Spark a $164m reduction in their current operational tax bill for 2023. This doesn't seem 'right'. But I am sure that the Spark tax liabilities reported in AR2023 must be legal and truthful. I have no alternative explanation as to how $164m disappeared from Spark's income tax liability in 2023. Were those 'deferred tax assets' really paid out to shareholders as imputation credits? That seems extraordinary to me. But note 6.1 in AR2023 suggests that is exactly what happened.

Looking again at the 'big picture', to assess whether the imputation credits earned are sustainable, I would use 'underlying earnings'. Underlying earnings are not corrupted by tax paid in advance, nor refunds due to transactions outside of the FY2021 to FY2023 (inclusive) study period, nor deferred tax from other sources.

Compare the information in post 2077 and you will see the 'underlying earnings' income tax payable derived in this post of $473m (the underlying imputation credits that should have been generated) does not support the quoted imputation credits on the dividends actually paid over the period. ($473m<$542.8m). Furthermore, neither do the imputation credits deposited from the 'declared earnings' (also calculated in this post) cover the imputation credits attached to the dividend ($357m<$542.8m). I am therefore forced to conclude that to pay the fully imputed dividends they have done, Spark must have put some extra money into the IRD income tax pot, despite it not being due. This is the only way a company can pay fully imputed dividends from earnings that are less than the sum of those dividends. This extra money does not come from thin air though. It must have come from capital that is already on the company balance sheet. So what were the shareholder funds on the balance sheet of Spark at EOFY2020, EOFY2021, EOFY2022 and EOFY2023?

--------------------------------------------------------------------------------------------------------

iii/ From the "Statement of financial position" in the respective AR


Shareholder FundsReference


EOFY2020$1,493mAR2020 p55


EOFY2021$1,503mAR2021 p63


EOFY2022$1,475mAR2022 p90


EOFY2023$1,940mAR2023 p90


less One off capital adjustment($534m)


equals adjusted EOFY2023$1,406m



Shareholders funds have bounced around over a '3 end of year period'. The FY2023 'change in equity statement' (AR2023 p91) showed a net earnings injection of $1,135m. This figure of course includes "$583m -$54m+$5m=$534m" of a net one off equity injection from previously described asset re-organisations. This is why I have removed $534m from our change in capital picture. The underlying capital lost by SPK over the three year period ending 30-06-2023 was $1,493m-$1,406m= $87m.

If we add $87m as a 'tax advance' to the underlying earnings imputation credits, then that is not enough to cover the shortage of imputation credits from underlying earnings to cover the actual dividends paid. ($433m+$87m=$520m < $542.8m - refer post 2077). In this particular year it does not matter because of the Connexa asset sales providing access to fresh 'one off' capital. But to me, this is continuing evidence that the dividend payments currently being dished out by Spark to shareholders are not sustainable in the medium term.

SNOOPY

[winner69]

Snoops …from one of your earlier posts I’m surprised you only want a 0.5% equity risk oremium (over bonds)

Doesn’t seem much

[Ricky-bobby]

Approaching the trading zone?…

[Snoopy]

Snoops …from one of your earlier posts I’m surprised you only want a 0.5% equity risk premium (over bonds)

Doesn’t seem much


On the market today we have the Spark SPF570 bonds (last trade at 5.915%) and SPF580 bonds (last trade at 6.03%), with both showing nothing on offer on either the buy or sell side as I write this. Not very liquid, for one of our largest corporates. But we can say 6.0% in round figures is the current market bond yield.

You think I am being a bit too accepting of 'putting up' with a dividend yield of 6.5% in that context?

Well, I did say that I would be looking for a 10% discount if buying into Spark today on my yield target figure. So that means my 'buy' yield would be at a 6.5%/0.9 =7.2% yield. Still even that number is only 1.2 percentage points above the bond yield. Is that number still not enough?

It is funny how these 'percentages' work. 7.2%/6.0%= 1.2. So another way of looking at this is to say that I am seeking a 'buy in' price at at 20% premium to the last quoted bond rate. Does that sound better?

Since making my post 2076 on this topic, the Spark share price has risen from $4.74 to $4.78. So it is just teetering on my value buy in price target, yet still I have not topped up my holding. What is holding me back? I am still not quite sure that I 'believe' the uplift in profit for FY2023, given all of those one off underlying factors that flowed through the accounts over FY2023.

My sticking point is on p130 of AR2023 where current income tax of $209m is adjusted downwards. The tax bill is normalised by $31m to take account of:
a/ one off costs associated with assets disposed of in the sale of Connexa ($26m),
b/ $2m in the unwinding of deferred tax assets AND
c/ $2m in tax for the current Spark Sport provision.

If I add $30m of tax adjustments back to the FY2023 tax bill, then the underlying tax bill reduces to $178m.

$178m paid in tax implies an underlying gross profit (assuming a company tax rate of 28%) of $178m/0.28 = $611m, which translates to an underlying net profit of $611m-$178m= $433m. But then if I look at the 'Change in Equity' statement for FY2023, fully franked dividends declared over the year added up to $486m. IOW the underlying earnings do not cover the dividend. They are a not insubstantial $53m or 2.9cps short. Yet management are making noises about another modest lift in dividend payments over FY2024! Am I right to be skeptical about Spark's ability to maintain their dividends at even present day levels 'fully franked'?

SNOOPY

[Snoopy]

But to me, this is continuing evidence that the dividend payments currently being dished out by Spark to shareholders are not sustainable in the medium term.


This stuff is getting above my pay grade. But I feel as though I need to crack on just one more step. This post is looking in more detail at the topic of 'Deferred tax' that I touched on in Part 3B (post 2078).

The FY2023 tax picture is clouded by the sell down of mobile tower asset holder Connexia (formerly known as 'Towerco' when it was 100% owned by Spark 'in house'). From AR2023 p130, ('income tax expense' sub note 2):
"Due to the difference between the 'right of use assets' and 'lease liabilities' (Snoopy note: there is that IFRS16 raising its ugly head again) recognised at the date of sale of Connexia, a deferred tax asset of $126m was recognised with a corresponding adjustment (reduction) in tax expense. The balance of the deferred tax asset was $124m as at 30th June."

What the above quote is telling us is that some of what would have been called 'rental costs' (rental fees paid on towers, now a finance charge called lease liabilities) have been 'forward loaded' into the current tax year as a result of IFRS16. And that is resulting in higher expenses and -as a result- a lower tax bill today, than if those towers had not been sold down. (However, this 'shifting of costs' will be recovered eventually by the time the rental agreement has wound up: Today's higher costs will be exactly balanced out by lower costs in compensating financial periods in the future).

Before the mobile network towers were sold, they would have been on the books at 'build value'. But the towers were sold at 'commercial rental value'. The difference between those two values was $583m (AR2023, Section 1.4 sale of Connexa, p95). Why mention this? As a result of the success of the tower sale, the lease liabilities going forwards for Spark are greater than they otherwise would have been, had 'Towerco' been maintained as a fully in house subsidiary. But these larger lease payments are offset by the bumper capital payment received by Spark for the said towers being used (at least partially) to retire debt, with the consequent downstream reduction in interest payments that such a large capital repayment implies.

Separately we learn, (also in AR2023 p130 'income tax expense' sub note 2) :
"The Spark Sport provision (Snoopy note: the winding up of this business unit which saw a loss of $54m booked) had a deferred tax impact at 30th June 2023 of $12m."
For the purposes of deferred tax, and for the purposes of this discussion, I prefer to think of the 'Spark Sport shut-down' by the parent as an 'offset' against against the much larger offsetting towers transaction gain over the FY2023 period.

The whole deferred tax situation is summarised in AR2023 on p96.

"Deferred Tax
Due to the difference between the right–of–use assets and lease liabilities recognised at the date of the transaction, a deferred tax asset of
$126 million was recognised, with a corresponding adjustment (reduction) to tax expense. The balance of the deferred tax asset at 30
June 2023 was $124 million. As noted in the statement of cash flows on page 92, payments for income tax in the year ended 30 June 2023
were $190 million (30 June 2022: $160 million)."

I have to admit I do not understand that quoted paragraph. We are told that there is a $126m deferred tax asset, that reduces tax expense. But then in the very next line we are told that the cash income tax payment -for the same period- from within the cashflow statement has sharply increased from $160m to $190m over the same period. I guess I am just tax stupid. But that paragraph reads to me like a complete contradiction. Has their current year tax bill reduced or not? What on earth are Spark trying to say here?

Moving on to Section 6.1 (AR2023 p131). In the table headed "Deferred Tax Assets and Liabilities" $123m of 'deferred tax assets' under the heading 'leases', are recorded in the current period. I am assuming this is the same figure as the $124m mentioned in the second paragraph of this post, the $1m difference being a 'rounding error'.

Last stop is section 6.5 (AR2023 p135): "Reconciliation of net earnings to net cashflows from operating activities". There we have an entry for 'deferred income tax' of $159m and another entry for the net gain on the sale of Connexia for $583m. I notice that $159m/$583m = 0.273, a figure very close to the company tax rate. A co-incidence? I think not. Despite assets sales as a rule not being taxable, it looks like Spark has booked a deferred tax credit for selling an asset in a transaction where no tax is payable! This is starting to get plain weird.

I guess it has become obvious to any tax accountants reading this post that I have no idea what I am talking about in this tax matter. But for cathartic reasons, I had to put my thoughts down anyway.

SNOOPY

[Ricky-bobby]

Be interesting to know how far they are though their share buy back?.. it will be keeping it propped up.

[ziggy415]

Be interesting to know how far they are though their share buy back?.. it will be keeping it propped up.

Just a whisker over 33,000,000 so only a 1/3 of the way if my maths are correct

[Ricky-bobby]

Thanks Ziggy.

[Ricky-bobby]

Pretty impressed with the customer service of spark lately. Got a double up on a roaming charge on my phn bill. Easy to question the charge and had a reply/result and handy hint for next time within a couple of hours. So good not having to wait on the phone for hours to resolve! Now air Nz is a different story, called 3 times. Same in emails and still no response. Been going for 3 months. Useless!

[ronaldson]

In defense of Air NZ I booked Australia flights for January online yesterday and had a problem allocating my accrued airpoints as a credit towards the fares. Got straight thru to a human being on the phone and was advised to amend my airpoints account profile. Did that and all fixed in less than five minutes.

[winner69]

NBR story

Spark NZ’s chair Justine Smyth has rejected a shareholder’s assertion at the telco's AGM in Auckland today that its share price performance has been worse than the NZX50 index's over the past year.

The comment came from Neil Anderson, who identified himself as speaking on behalf of the New Zealand Shareholders’ Association when he stated the analysis and said it was disappointing given the NZX-listed company has been buying back shares.

“Do you have some comment on that? And what would the company be trying to do to improve the share price, please?” Anderson asked.

Justine basically said

“Certainly the whole NZX market is down, but we don't think on a relative basis that we have suffered more than others. In fact, during that time we have returned to shareholders as well.”


Suppose Justine couldn’t really say buybacks are just a cosmetic thing and at the end of the day rarely add any real shareholder value

[Aaron]

Suppose Justine couldn’t really say buybacks are just a cosmetic thing and at the end of the day rarely add any real shareholder value
We are told buy backs are the best way to reinvest a surplus, but I would have thought increasing your dividend would have been a better way to go.

Hey Winner many years ago were buybacks illegal prior to the Companies Act 1993??

If so why?

[thedrunkfish]

Depends the angle you are looking at it from, in my opinion Spark is undervalued so a buyback makes sense and increases shareholder value.

Another boring share that has been doing nicely lately.

[Sideshow Bob]

https://www.nzx.com/announcements/426966

• Growth in adjusted1revenue and EBITDAI2 underpinned by strong performance in mobile andmomentum in data centres and high-tech. On a reported basis revenue and EBITDAI declined asSpark cycled the significant net profit declared in FY23 following the TowerCo and Spark Sporttransactions
• NPAT3 decreased on an adjusted basis by 4.8% to $157 million
• H1 FY24 dividend of 13.5 cents per share declared, 100% imputed
• Reaffirmed FY24 EBITDAI, capital expenditure, and total dividend guidance

[nztx]

A bit of a surprise sting on the B^m incoming from this outfit today:



We’re no longer offering Xtra Mail for free

Xtra Mail has kept New Zealanders like you connected for almost 30 years. However, costs to run the service have increased significantly and it’s no longer sustainable to offer it for free.

So, from 16 May 2024, Xtra Mail will cost $5.95 a month for Spark broadband, pay monthly mobile and landline customers and $9.95 a month for everyone else.


That's a $71 pa spike in cost for those on Broadband

Likely to affect all their Customers using XTRA email accounts

[thedrunkfish]

Most people wont use it though mate, can't remember the last time i laid eyes on an xtra.co.nz email address tbh

[dobby41]

Most people wont use it though mate, can't remember the last time i laid eyes on an xtra.co.nz email address tbh

You need to get out more - there are thousands of them.
Back in 2018 they had 720k.

[percy]

Very reasonable price to pay for an excellent service.
Yes we are a Spark shareholder and my email address is with xtra.
Only issue I have had was poor wireless reception,which caused me to go to fibre.[which has been great].

[nztx]

Just one question - how do they work out that something part of their existing offering is now actually recoverable at an $71 pa extra walloping of their customer ?

What have they added to justify all that extra loot being charged out ? About an extra month's wifi broadband cost being added on that charge spike up ..

How about all those who were sold Xtra plans with free Xtra email addresses ?

Do gmail charge or only above certain space quota ? for a fair wack of xtra email accounts - the messages are pulled off their mail servers & therefore only stored a brief time ?

It looks rather like a Price hike to me in times when data storage etc is supposedly reducing in price :)

Will they be charging for sending their monthly Xtra bills out to non-Xtra email addresses next ?


A bit like the Petrol stations charging for their fuel and then looking at charging patrons to use the bowsers to put the stuff into the wagon, as an example :)

[clip]

Just one question - how do they work out that something part of their existing offering is now actually recoverable at an $71 pa extra walloping of their customer ?

What have they added to justify all that extra loot being charged out ? About an extra month's wifi broadband cost being added on that charge spike up ..

How about all those who were sold Xtra plans with free Xtra email addresses ?

Do gmail charge or only above certain space quota ? for a fair wack of xtra email accounts - the messages are pulled off their mail servers & therefore only stored a brief time ?

It looks rather like a Price hike to me in times when data storage etc is supposedly reducing in price :)

Will they be charging for sending their monthly Xtra bills out to non-Xtra email addresses next ?


A bit like the Petrol stations charging for their fuel and then looking at charging patrons to use the bowsers to put the stuff into the wagon, as an example :)


They are providing a service (email) which incurs costs to provide (storage space, hosting costs, antispam, security enhancements, software upgrades - among other things).

Over time these costs will have increased/will continue to increase due to - ever increasing storage sizes, software going out of date, needing to be patched, eventually needing to be completely rebuilt/replaced when the software meets end of life. Completely understandable to charge for it and surprising it has taken so many many years to do so

[nztx]

They are providing a service (email) which incurs costs to provide (storage space, hosting costs, antispam, security enhancements, software upgrades - among other things).

Over time these costs will have increased/will continue to increase due to - ever increasing storage sizes, software going out of date, needing to be patched, eventually needing to be completely rebuilt/replaced when the software meets end of life. Completely understandable to charge for it and surprising it has taken so many many years to do so


Let's see how many others follow SPK's lead, or otherwise to try to harvest some market share

Currently have a free deal elsewhere .. they require email box cleared regularly off their mail servers
on multiple mail accounts and offer all the same bells & whistles for Zero cost.

Some of the Competitors might view SPK's move as a wonderful marketing opportunity to get a leg up on SPK ;)

[clip]

Let's see how many others follow SPK's lead, or otherwise to try to harvest some market share

Currently have a free deal elsewhere .. they require email box cleared regularly off their mail servers
on multiple mail accounts and offer all the same bells & whistles for Zero cost.

Some of the Competitors might view SPK's move as a wonderful marketing opportunity to get a leg up on SPK ;)

The thing with xtra mail is that the people who have had it for 20+ years and not bothered to move to other, better, free options, are likely to be one of a few things:

1) don't want to change their email address so will pay to keep it
2) don't know how to change their email address so will pay to keep it
3) won't look at their bill/ever notice the cost increase and will pay to keep it

I don't think it's a big deal like you are making it out to be

[Jay]

The thing with xtra mail is that the people who have had it for 20+ years and not bothered to move to other, better, free options, are likely to be one of a few things:

1) don't want to change their email address so will pay to keep it
2) don't know how to change their email address so will pay to keep it
3) won't look at their bill/ever notice the cost increase and will pay to keep it

I don't think it's a big deal like you are making it out to be

I'm one of those, not 2 & 3 but easier than trying to change everything. Thought I think the Firbre price is not too far away from anyone else, all these so called cheaper options are only for the first 3, 6 months etc or the speed or data amount limited

May Find the other will do the same e.g. 2 degrees etc

Vodafone (ONE) just ditched it all together, had no option!

[Snoopy]

I'm one of those, not 2 & 3 but easier than trying to change everything. Thought I think the Fibre price is not too far away from anyone else, all these so called cheaper options are only for the first 3, 6 months etc or the speed or data amount limited

May Find the other will do the same e.g. 2 degrees etc

Vodafone (ONE) just ditched it all together, had no option!


I am with 2 degrees and I am already paying $10.95 a month for my mailbox only account (no internet access). So Spark at $5.95 a month looks like an absolute bargain to me. To me a credible ISP must run their own mailbox system. Do I really want my e-mail with some US outfit in the cloud? What do you do if something goes wrong? It is quite obvious that the cost of providing an e-mail server is not free. With more and more competition in the market for broadband, these cross subsidised products eventually have to unwind so that users pay their actual costs. You are kidding yourself if you really believe you are getting 'free' e-mail. Your 'free' e-mail account with your US provider becomes an asset, access to which your provider can then sell to those paying for an advertising banner when you log into your e-mail website. Spark e-mail has always been cross subsidised, even if it was only part of a packaged link to get you to sign up to a 'Spark broadband deal'. But when the cross subsidy is removed, then people start whinging? Well, this is just part and parcel of what an open broadband market is all about. Plenty of options out there if you want to go the 'free' internet e-mail account way.

Because of their lack of e-mail facilities I personally would never sign up with Vodaphone for broadband, whatever the price.

SNOOPY

[Ferg]

Because of their lack of e-mail facilities I personally would never sign up with Vodaphone for broadband, whatever the price.

All the more reason to separate your e-mail provider from your ISP. This means you can change ISP without the hassle of changing e-mail address.

OT I know but I have used free gMail for over 20 years and they never sold my address. It was me signing up for silly things in the past few years that got me onto various spam lists plus a secondary account has never had spam. However, today I took the plunge and subscribed for a not free plan at a cost of $34.99 p.a. to give me more features. A bargain compared to Spark.

[850man]

All the more reason to separate your e-mail provider from your ISP. This means you can change ISP without the hassle of changing e-mail address.

OT I know but I have used free gMail for over 20 years and they never sold my address. It was me signing up for silly things in the past few years that got me onto various spam lists plus a secondary account has never had spam. However, today I took the plunge and subscribed for a not free plan at a cost of $34.99 p.a. to give me more features. A bargain compared to Spark.

I'm with you on this one Freg. ISPs offer email to keep people tied to their internet service and nothing more. I also don't believe any of them offer in-house email these days, may appear that way but it's just branding and will be hosted by Microsoft in reality. Spark don't even host email for their employees, it's all in Microsoft Exchange online. Decoupling email and Internet services gives you freedom to move around for the best deal.

[mistaTea]

https://www.nzherald.co.nz/nz/spark-sells-a-blind-man-an-ultra-hd-tv-consumer-nz-urges-complaint-to-commerce-commission/HLKIBVLWU5BJ5JHX4IQSIZ7SXM/

Well, I mean it could have been worse I suppose.

At least they weren't selling tickets to a one-legged man for an a$$-kicking contest!

[see weed]

https://www.nzherald.co.nz/nz/spark-sells-a-blind-man-an-ultra-hd-tv-consumer-nz-urges-complaint-to-commerce-commission/HLKIBVLWU5BJ5JHX4IQSIZ7SXM/

Well, I mean it could have been worse I suppose.

At least they weren't selling tickets to a one-legged man for an a$$-kicking contest!
You made my day. That is funny:t_up:. As for the email charge, if you can't beat them, then join them. I am in the process of buying up lots of SPK for the div. so am not too concerned with a $5.95 per month fee. That is one pot of green tea at a cafe. And it is tax deductible, or you could buy 300 shares in SPK and the div will pay your your yearly email cost.;)

[ratkin]

The thing with xtra mail is that the people who have had it for 20+ years and not bothered to move to other, better, free options, are likely to be one of a few things:

1) don't want to change their email address so will pay to keep it
2) don't know how to change their email address so will pay to keep it
3) won't look at their bill/ever notice the cost increase and will pay to keep it

I don't think it's a big deal like you are making it out to be

I will likely keep although it is annoying. Have had the same address for over 20 years.
I think this might backfire on them. A few times over the years I thought of changing to
cheaper companies, and it was actually losing my email address that put me off. Now I am
more likely to look at cheaper alternatives for my internet.

I should sit down and go through my emails and change my settings on websites etc, to a gmail.
Question is, can I be bothered? For 5 dollars per Month, probably not

[Bjauck]

I'm one of those, not 2 & 3 but easier than trying to change everything. Thought I think the Firbre price is not too far away from anyone else, all these so called cheaper options are only for the first 3, 6 months etc or the speed or data amount limited

May Find the other will do the same e.g. 2 degrees etc

Vodafone (ONE) just ditched it all together, had no option!
Yep. Xtra is being kinder than Vod/Ihug as at least you can keep the email address if you want for a fee - for now anyway.

At least phone numbers are now portable to a different provider.

[Grimy]

I will likely keep although it is annoying. Have had the same address for over 20 years.
I think this might backfire on them. A few times over the years I thought of changing to
cheaper companies, and it was actually losing my email address that put me off. Now I am
more likely to look at cheaper alternatives for my internet.

I should sit down and go through my emails and change my settings on websites etc, to a gmail.
Question is, can I be bothered? For 5 dollars per Month, probably not

Pretty much my situation too. And I probably won't be bothered to change either. What will make me change is if/when I decide to stop being a Spark customer.

[clip]

I will likely keep although it is annoying. Have had the same address for over 20 years.
I think this might backfire on them. A few times over the years I thought of changing to
cheaper companies, and it was actually losing my email address that put me off. Now I am
more likely to look at cheaper alternatives for my internet.

I should sit down and go through my emails and change my settings on websites etc, to a gmail.
Question is, can I be bothered? For 5 dollars per Month, probably not

You should look at what plan you are on now, vs what plans they have available. If you haven't changed for a long time, you may find you can get the same thing or better/faster, for cheaper than what you are paying now - and keep the email address.

This depends on where you live and what type of internet you need/want, how much data you use etc. But you can get standard everyday fibre for $81 a month - might already be cheaper than what you're on now?

Everyday fibre $81/month
Standard fibre $91/month

[Jay]

I should sit down and go through my emails and change my settings on websites etc, to a gmail.
Question is, can I be bothered? For 5 dollars per Month, probably not

I'm with you on this, however signing up to anything "new" will use another email from now on

[Jay]

You should look at what plan you are on now, vs what plans they have available. If you haven't changed for a long time, you may find you can get the same thing or better/faster, for cheaper than what you are paying now - and keep the email address.

This depends on where you live and what type of internet you need/want, how much data you use etc. But you can get standard everyday fibre for $81 a month - might already be cheaper than what you're on now?

Everyday fibre $81/month
Standard fibre $91/month

Yeah found that out twice, signed up to a "special" deal, then without telling you bring something out better and cheaper while you're still on the original plan and paying more

[Jiggs]

Why do my Spark shares drop in price 5-10% every autumn and spring then rise up the same again in midsummer and midwinter?

How many of you sell at the middle and end of each year and buy again at the equinox?

[mshierlaw]

Why do my Spark shares drop in price 5-10% every autumn and spring then rise up the same again in midsummer and midwinter?

How many of you sell at the middle and end of each year and buy again at the equinox?

Graph shows that generally lows are when the stock goes ex dividend. I buy on the intersection with the lower trend line.
15008

[Ricky-bobby]

Traders delight… so time to jump in or not quite right?..

[Jiggs]

I’ve noticed it drops ex dividend. But the dividend is only 2 or 3 percent. Why the 5 to 10 pc drop? Naive Henny Penny shareholders? “The sky is falling on my head!”

[mshierlaw]

Traders delight… so time to jump in or not quite right?..

If I was looking for more I would have bought CD. Still good buying XD at this price IMHO.

HUGE reballancing tonight.

[Snoopy]

Gross Dividend Calculations

FY2019P2, FY2020 P1, FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1, FY2022P2, FY2023 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)

FY2023 P2, FY2024 P1:
13.5c (Ordinary, 100% imputed) = 13.5c (FI) = 13.5c/0.72 = 18.75c = 18.75c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total


FY201912.5c + 12.5c16.15c + 16.15c16.15c


FY202012.5c + 12.5c16.15c + 16.15c32.30c


FY202112.5c + 12.5c17.36c + 17.36c34.72c


FY202212.5c + 12.5c17.36c + 17.36c34.72c


FY202312.5c + 13.5c17.36c + 18.75c36.11c


FY202413.5c + ?c18.75c + ?c18.75c


Total172.75c



Now we come to selecting the capitalisation rate. Spark Bonds (SPF570 and SPF580) are currently trading in the secondary market at yields of around 6%. I think Spark shareholders need a greater implied return than that, to compensate for the risks equity ownership. Having said that, from an operational perspective Spark is a very stable company. So I think a 6.5% gross interest return on your shares bought, in today's high interest rate environment, would still be fair. The five year historical average gross dividend received by shareholders from Spark was:

172.75 / 5 = 34.55c

The capitalised dividend value of Spark (fair value) is therefore: 34.55c/0.065 = $5.32

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.32 x 0.9 = $4.78. With the share closing at $4.74 on Friday, did I just 'ring the bell'?


Gross Dividend Calculations

FY2020 P1, FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1, FY2022P2, FY2023 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)

FY2023 P2, FY2024 P1, FY2024 P2:
13.5c (Ordinary, 100% imputed) = 13.5c (FI) = 13.5c/0.72 = 18.75c = 18.75c (gross dividend)




Year
Dividends as DeclaredGross DividendsGross Dividend Total





FY202012.5c + 12.5c16.15c + 16.15c32.30c


FY202112.5c + 12.5c17.36c + 17.36c34.72c


FY202212.5c + 12.5c17.36c + 17.36c34.72c


FY202312.5c + 13.5c17.36c + 18.75c36.11c


FY202413.5c + 13.5c18.75c + 18.75c37.50c

Total[/TD]172.35c



Now we come to selecting the capitalisation rate. Spark Bonds (SPF570, SPF590 and SPF600) are currently trading in the secondary market at yields of around 5.1-5.3%. That is well down on the 6% of September 2023
Even so, Spark shareholders need a greater implied return than that, to compensate for the risks equity ownership. Having said that, from an operational perspective Spark is a very stable company. So I think a 6.5% gross interest return on your shares bought, in today's slightly less high interest rate environment, would still be fair. The five year historical average gross dividend received by shareholders from Spark was:

175.35 / 5 = 35.07c

The capitalised dividend value of Spark (fair value) is therefore: 35.07c/0.065 = $5.40

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.40 x 0.9 = $4.86. With the share closing at $4.76 on Friday, 'Ring ring'?

SNOOPY

[Snoopy]

Presentation link:
https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/H1FY24-Results-Summary-FINAL.pdf

Accompanying Conference Call Link:
https://investors.sparknz.co.nz/FormBuilder/_Resource/_module/gXbeer80tkeL4nEaF-kwFA/audio/Spark_New%20Zealand_H1_FY24_Results_Announcement.m p3

This is not a 'time sequential report' of the above presentation and accompanying conference call. I have taken the broad reporting subject areas discussed in the first half of the conference call, and added to those topics some 'analyst questions asked answers', from the latter half.

Comparative financial reporting numbers used are adjusted by removing FY2023 one offs:
a/ Stripping out the expenses incurred in closing down Spark Sport, AND
b/ Removing the profits from the cell tower sell down.
However, opex costs for Spark Sport have not been removed from the prior comparative period.

1/ Spark net profit was down 4.8% on the pcp (HY2023), due to increased interest payments and lease costs (principally to Connexa - the 'sold down to' mobile phone tower infrastructure provider).

2/ Cashflow was down on the pcp, due to the larger share of the investment capital program, including investments in CRP (the 'cost reducing program'?), going through in the first half year. $286m of this years capital investment from a $510-$530m capital investment .program was spent, including the Takanini data centre expansion, completed in the first half of the financial year. The key driver of cashflow going forwards will be the improvement in EBITDA. Marketing and acquisition costs are incurred 'up front', before the customers 'come on board' in the second half year. Mobile price increases, larger Data Centre scale, and IT product growth (following on from a pcp decline), should improve the top line in 2HY2024. 'New product offerings' often include greater automation, and that in turn lowers the cost base going forwards. Mobile handset sales saw a more subdued retail environment in the first half.

3/ Mobile remains central to Spark's growth., +6.3% c.f. prior period (HY2023), or $30m. Service revenue and pay-monthly ARPU growth was driven by price increases, connection growth, and $7m of growth in roaming revenues, which are tracking above pre-Covid levels (now at 107% of that total, which from an outbound perspective is 'sitting pretty high', even if inbound remains subdued). The Spark mobile brands (which include Skinny) captured 47% of total connection growth in the half. But travellers re-entering the market had a negative effect on ARPU. Overall, Spark mobile market share was 44% of mobile service revenue over the period.

Enterprise segment (business) revenue (ARPU) declined, reflecting the highly competitive nature of this market. Some 'shedding of lines', -not losing a customer altogether but reducing the number of lines in and out of a business-, added to the revenue loss.

Data over the 4G network is increasing exponentially and the investment in 5G, while not necessarily earnings positive while being rolled out, can be seen as 'future proofing' the whole mobile network. If Spark were not spending as much on 5G today, then they would be spending more on 4G instead. Once 5G service is available throughout the country, then it can be 'charged for' at a price premium.

A Connexia (mobile phone tower owning company) build program for new towers is underway, albeit at a low 'start up' level. Downstream lease cost increases for Spark are expected to be modest over the next couple of years, more in line with inflation. For Spark today, $5m is the 'net loss' compared to the comparative period connected to Connexia (or at least the costings in the Spark share of this) and RCG (the combined rural build out program venture with 2 degrees and 'One NZ'), with by far the majority of that extra money being Connexia related. This extra cost reflects the 'start up phase' of these two build out programs, with this 'incremental loss' expected to improve over time.

The impact of Connexia on Spark NPAT level is relatively neutral. Spark avoids depreciation, because they don't own the towers any more. There is a lower interest bill, because the capital injection associated with the sale has reduced the need for borrowing. The biggest component of the future 'tower programmed build out' is still a couple of years away.

4/ Wireless broadband (using Spark's own mobile network) grew to 31% of the total Spark broadband customer base.

5/ The 'total cloud revenue' was flat. But profit was up, because the cost base has been reset. A 'hybrid cloud service' was launched in the half year. The private and public cloud grew as well. But there was an $8m (or 10%) decrease in 'service management revenue', primarily due to lower public sector demand, - leading to an overall flat result.

6/ The 10MW incremental gain in Takanini data centre capacity is now being 'fully billed'. In fact, 88% of total Spark data centre capacity is already committed under contract, and has clear revenue pathways. The 'Cloud Cost Reset' will see labour cost reductions flow through to the second half. 'Hyperscaling', with respect to comments made by Spark in their own context, encompasses the size and commitments of data centres already planned by Spark, but not those an order of magnitude in size above that!

7/ High tech and virtual technology revenue, includes the 'Internet of Things', - where revenue grew strongly by 13% to $35m (now 1.8m customer connections). Several converged technology 'proof of concept' trials are underway for customers. High tech (which includes digital identification start up MATTR), is the area where most improvement in profitable execution is needed. MATTR is not expected to be commercially significant in a Spark group context, until FY2026 at the earliest. Meanwhile, there is the 'Ministry of Primary Industries' (MPI) fishing boat visual imaging project already in place, while initiatives in measuring water quality, and road network quality are potential further applications. 5G is the 'backbone investment' that will commercially enable all of this technology.

High tech data business Qrious, - encompassing professional services and virtual transformation-, has also been also impacted. But this is more a 'business environment' and 'election uncertainty' issue. Qrious is expected to 'bounce back' in 2HY2024.

8/ Spark's Digital Health operation was down, due to the public sector slowdown (principally 'Te Whatu Ora'/ 'Health NZ' related). The private sector is now seen as 'the growth opportunity here e.g. via 'private hospitals' and 'primary care'. But digitisation of government health is still 'going to occur' and 'needs to occur', indicating that growth in Spark Health has been postponed rather than cancelled. The half year downturn is more about the economic environment and the 'shift in uncertainty', that the threat of 'countrywide citizen level job cuts' and restructuring creates.

9/ The 'cost out' over FY2024, originally forecast to be $40m-$60m, including product cost decline by $5m as voice costs continue to decline, is set to be 'more than modestly' exceeded.

10/ Spark is looking for a 'return' of 9-10% ('return' meaning, a 'net operating profit after tax' over 'invested capital') on data centres once operating at capacity. Third party partners may be brought in to help fund these data centres. A 9-10% return ensures that the IRR is above WACC. The signed customer contracts include an inflation adjustment element This is a higher return that global hyperscale data centres are generating. But remember, global hyperscale is on a 'next level' compared to Spark 'hyperscale'.

11/ 'eps' is running below 'dps'. Are fully imputed dividends sustainable? 'Full imputation' is confirmed for FY2024. Looking further out, it will be the improvement of free cashflow that will be needed to support the payment of a fully imputed dividend. Increasing free cashflow is part of the business plan. This is the basis on which dividend imputation is approached. But no 'long term guidance' by Spark was given as firm on imputation.

12/ On telecommunications competition, the market remains competitive. But no significant market share swap has occurred between the 'big 3 players' in either mobile or broadband.

SNOOPY

[Entrep]

Some bids hit today

[Snoopy]

11/ 'eps' is running below 'dps'. Are fully imputed dividends sustainable? 'Full imputation' is confirmed for FY2024. Looking further out, it will be the improvement of free cashflow that will be needed to support the payment of a fully imputed dividend. Increasing free cashflow is part of the business plan. This is the basis on which dividend imputation is approached. But no 'long term guidance' by Spark was given as firm on imputation.


Amongst the half year presentation questions, the above analyst's question was one that particularly caught my eye. I expressed my same concern about this matter a year ago.



Just noticed this admission in the FY2021 to FY2023 Strategic Outlook, Slide 6.

"(Solid progress made) in the Dividend Sustainable total dividend of 25cps or above that is not supplemented by debt."

This is an admission that as the FY2020 drew to a close, the dividend was being 'beefed up' by taking on more borrowings. The last dividend paid during FY2020 was the interim dividend for FY2020. That dividend was only 75% imputed. Looking back further, the previous four semi-annual dividends were likewise only 75% imputed.

Spark management were obviously aware that 'borrowing to supplement the dividend' was not a sustainable policy. Since FY2021, all subsequent half year dividends have been fully imputed. But how (considering the mismatch between underlying earnings and dividends) ? That is the question I am still grappling with.


Time for an update, to see if earnings really are keeping up with those increased dividends.

SNOOPY

[Snoopy]

A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at 30-06-2020" (AR2020 p94, confirmed in AR2021 p100)

A 'nil imputation credit balance' means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the three year period following EOFY2020, what fully imputed dividends were paid out?



Dividends Paid FY2021 & FY2022Gross DividendNet DividendImputation Credits


Second HY dividend FY2020$319.4m$230m$89.4m


First HY dividend FY2021$320.8m$231m$89.8m


Second HY dividend FY2021$323.6m$233m$90.6m


First HY dividend FY2022$325.0m$234m$91.0m


Second HY dividend FY2022$325.0m$234m$91.0m


First HY dividend FY2023$325.0m$234m$91.0m


Total$542.8m



Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend



-------------------------

Now, how does that $542.8m imputation credit total paid out line up with the amount of tax paid up by the company over that same period? From the respective cashflow statements:



Income Tax paid over FY2021$188m


Income Tax paid over FY2022$160m


Income Tax paid over FY2023$190m


Imputation Credit Balance Owing EOFY2023$32m(See AR2023, p131)


Total$570m



This means enough tax has been paid to cover those fully imputed dividends. Or perhaps more correctly, enough tax would have been paid, if Spark had got around to paying that outstanding tax debt of $32m of imputation credits owing! But the imputation credit balance isn't really owing (yet), because of the mismatch of the ending of the Spark reporting financial year (30th June) , and the Spark tax financial year that ends 9 months later (31st of March of the following year). That means the unpaid imputation credit balance of $32m is actually an accounting construct, caused by Spark choosing to put a line under their year at the end of 30th June, while the same $32m is a bill 'not yet due' from an IRD perspective.

There is a reported deficit on income tax credits, - which is odd in itself as I was under the impression that income tax credits could not be issued to shareholders until the underlying tax bill was paid (does this mean that the negative imputation credit balance as at 30th June was brought up to zero 'and then some' ($32m+$91m= $123m) before the payment of the final dividend in October, despite the negative imputation credit balance payment not being required to be paid by the IRD until 31st March the following year? - I guess it does!) So does all of this line up with the income tax payments expected to the IRD as reported to the half year ended 31st December 2022 (EOHY2023)? 'Kind of' - the half year cashflow statement shows income tax payments to the IRD of $120m over that period. That means the income tax payment by the final dividend payment date looks to have been $3m shy.


A summary of 'the facts we know'.

"Spark had an imputation credit balance of nil as at their balance date of 30-06-2020" (AR2020 p94, confirmed in AR2021 p101)

A 'nil imputation credit balance' @30-06-2020 means that all of the imputation credits paid out after 30-06-2020, must have also been paid up after 30-06-2020. So in the period following EOFY2020, what fully imputed dividends were paid out? We can find this information under financial note 4.5 in the respective annual report(s) titled "Equity and Dividends."



Dividends Paid FY2021 & FY2022 & FY2023Gross DividendNet Dividend
Imputation CreditsDeclared HY Net Earnings
Imputation Credits

Second HY dividend FY2020 (12.5cps)$319.4m$230m$89.4m
$147m


First HY dividend FY2021 (12.5cps)$320.8m$231m
$89.8m
$234m


Second HY dividend FY2021 (12.5cps)$323.6m$233m$90.6m
$179m


First HY dividend FY2022 (12.5cps)$325.0m$234m$91.0m
$231m


Second HY dividend FY2022 (12.5cps)$325.0m$234m$91.0m
$165m (2)



First HY dividend FY2023 (13.5cps)$350.0m$252m$98.0m
$298m (3)



Sub Total$1,414m$549.8m$1,254m



Second HY dividend FY2023 (13.5cps)$345.8m$249m$96.8m
$157m



Sub Total$1,663m$646.6m$1,411m



First HY dividend FY2024 (13.5cps)$340.3m$245m$95.3m
$?m



Total$1,908m$741.9m$?m




Calculation Notes

1/ Gross dividend = (Dividend Paid)/0.72, Imputation Credits = Gross Dividend - Net Dividend
Note that the first dividend shown in the above table, paid on 20th October 2020 was fully imputed, as have been all dividends since.

2/ Normalised profit calculation for HYR2023 Note 5: $837m-$584m+$52m-$140m=$165m

3/ For FY2023, I have removed from the declared profit, one off transactions to create an estimate of the ongoing 'operating profit'. Specifically my adjustments were:
3i/ The $583m one off net gain on the sale of Spark's majority interest in Connexa, the mobile phone tower holding company, was subtracted (AR2023 p95).
3ii/ The subsequent revaluation upwards of the Spark stake in Connexa following the 'Connexa 2 degrees' transaction (a $5m gain in an invested entity valuation) was subtracted (AR2023 p94).
3iii/ One off costs associated with the selling down of Spark's share of Connexa, totalling $30m, were added back.
"$26m for the costs associated with the assets disposed of in the sale of Connexa, $2m for the unwinding of a deferred tax asset associated with the Connexa transaction and $2m of current tax adjustment for the Spark Sport provision. (AR2023 p130 under sub note 1 (under 'income tax expense' header).
3iv/ The $54m loss on the closing of Spark Sport was added back (AR2023 p94).
3v/ Tax effect of Connexa sale, Spark Sport write down and the subsequent dilution effect from the 2 degrees towers being folded into Connexa, diluting the Connexa holding of Spark but also modestly increasing the value of that stake: Total $168m. (AR2023 p103).

Total FY2023 Profit Adjustment = (-$583m+$54m-$5m+$30m) -$168m = -$672m
Total Normalised FY2023 Profit = $1,135m - $672m = $463m





-------------------------

Now, how does that $646.6m imputation credit total paid out line up with the amount of tax paid up by the company over the SOFY2021 to EOHY2024 reference period? From the respective cashflow statements:



Income Tax paid over FY2021$188m


Income Tax paid over FY2022$160m


Income Tax paid over FY2023$190m


Income Tax paid over HY2024$101m



Imputation Credit Balance Owing EOHY2024$?m(Balance owing was 'nil' at 31/03/2024, but not declared at 31/12/2023)


Confirmed Total$639m



At this point I should record that 'cash payments' of tax in any particular year can include wash up payments for a previous year and forecast provisional payments for an ensuing year. So if you compare the tax payments from the cashflow statement for any particular year, and try to compare that to the NPBT for the year multiplied by 28% (the company tax rate), then those two numbers may not be equal, But if you do a sum comparison over many years those single year tax differences will tend to average out.

This means almost enough tax has been paid to cover those fully imputed dividends to EOHY2024. The figures imply that at EOHY2024, there was a negative imputation credit balance (tax debt owing) on the books of: $646.6m-$639m=$7.6m to 'close the gap'. Spark are only legally required to 'close that gap' (not have a negative imputation credit balance) for 'tax not paid' by 31st March of the following calendar year (31-01-2024). That explains why they haven't done it - a prudent conservation of cash measure no doubt - at the HY2024 reporting date (31-12-2023).

The problem that remains is that when we add up operational earnings, in this case for a 3.5 year period, the sum total is significantly less than the net dividends paid out over that same period. Sure if you add back the one off profit from the Connexa sale, then the dividends paid since our reference date are perfectly affordable. But pumping up dividends (and the supporting tax payments to IRD to allow full dividend imputation?) from either borrowings or the proceeds from asset sales, did not seem sustainable to me a year ago. And it still doesn't now.

SNOOPY

[Snoopy]

The problem that remains is that when we add up operational earnings, in this case for a 3.5 year period, the sum total is significantly less than the net dividends paid out over that same period. Sure if you add back the one off profit from the Connexa sale, then the dividends paid since our reference date are perfectly affordable. But pumping up dividends (and the supporting tax payments to IRD to allow full dividend imputation?) from either borrowings or the proceeds from asset sales, did not seem sustainable to me a year ago. And it still doesn't now.







Declared Earnings verses Dividends Paid FY2021 & FY2022 & FY2023Gross DividendNet Dividend
Imputation CreditsDeclared HY Net Earnings


Second HY dividend period FY2020 (12.5cps)$319.4m$230m$89.4m
$147m


First HY dividend period FY2021 (12.5cps)$320.8m$231m
$89.8m
$234m


Second HY dividend period FY2021 (12.5cps)$323.6m$233m$90.6m
$179m


First HY dividend period FY2022 (12.5cps)$325.0m$234m$91.0m
$231m


Second HY dividend period FY2022 (12.5cps)$325.0m$234m$91.0m
$165m



Sub Total$1,162m$451.8m$956m



First HY dividend period FY2023 (13.5cps)$350.0m$252m$98.0m
$298m



Sub Total (FY2023 balance date)$1,414m$549.8m$1,254m



Second HY dividend period FY2023 (13.5cps)$345.8m$249m$96.8m
$157m


Sub Total$1,663m$646.6m$1,411m


First HY dividend period FY2024 (13.5cps)$340.3m$245m$95.3m
$?m


Total$1,908m$741.9m$?m



-------------------------

A few more reflections on the above table, which, given I have been tweaking it for the last couple of days, may look a little different now to those who saw it in its original form.

What is very apparent now is the 'seasonality between halves' in the earnings results. Being a utility company I had assumed that profits would have been more or less equally distributed throughout the year. How wrong I was to have assumed that! Those numbers are nevertheless consistent with the recent half year conference call response on how the business operates.



2/ Cashflow was down on the pcp, due to the larger share of the investment capital program, including investments in CRP (the 'cost reducing program'?), going through in the first half year. $286m of this years capital investment from a $510-$530m capital investment .program was spent, including the Takanini data centre expansion, completed in the first half of the financial year. The key driver of cashflow going forwards will be the improvement in EBITDA. Marketing and acquisition costs are incurred 'up front', before the customers 'come on board' in the second half year. Mobile price increases, larger Data Centre scale, and IT product growth (following on from a pcp decline), should improve the top line in 2HY2024.


Having said that, the way Spark claim they operate looks a bit iffy under more scrutiny. Why do they spend big from July to December to reap the rewards in January to June? Wouldn't it be equally valid to spend in January to June to reap the rewards in the following July to December?

This seasonal earnings phenomenon affects the 'imputation credit hunt' in a noticeable way. The cumulative difference between income tax paid on earnings and imputation credits paid out over the same period is much less marked:
i/ at the full year balance date (for FY2023: $1,414m-$1,254m=$160m)
ii/ compared to the ensuing half year balance date (HY2014: $1,663m - $1,441m = $222m), or
iii/ compared to the preceding half year balance date (HY2013: $1,162m-$956m = $206m).

There is less detail presented in the unaudited half year reports. That makes chasing up what has been happening to those tax payments more difficult. But I did find this in HYR2023 on page 10, referring to the sale of cell towers to Connexa.

-----------------------

Deferred tax assets and income tax credit

Due to the difference between the right-of-use assets and lease liabilities recognised at the date of the transaction, a non-cash deferred tax asset of $126 million was recognised, with a corresponding adjustment to tax income. As noted in the statement of cash flows on page 6, payments for income tax in H1 FY23 were $120 million (H1 FY22: $93 million).

---------------------

At EOFY2022 the total Deferred Tax Asset and Liability number was a deficit: ($108m) (see AR2022, Financial note 6.1, p120)
At EOFY2023 the total Deferred Tax Asset and Liability number was a positive: $55m (see AR2023, Financial note 6.1, p121)

That is a turnaround of $55m--$108m=$163m. That is very close to my calculated cumulative full year tax deficit for FY2023 above, of $160m.

So what do you think fellow sharetraders? Have I solved the missing tax payment mystery? Can what I had thought of as a paper 'accounting adjustment on a leaseback deal' really reduce income tax payment requirements due in real time by counting as 'income tax paid'? Or is all of this an irrelevant co-incidence?

SNOOPY

[Snoopy]

My sniffer ran into a blind alley last year, as the hunt for the source of those 'bonus' imputation credits went unsolved. But I am back on the trail again sniffing around the Spark accounts to try and figure out where those extra imputation credits, over and above normalized profits, came from. At this point most dogs would be happy with a good pat, a few dog biscuits and a bit of time in a warm corner of the house to have a sleep in the dog basket. So why am I still sniffing around out here?

In a word 'yield'. If I invest in a company for its yield, then I have to figure out if that yield is genuinely sustainable. The management remark that we just keep driving the EBITDA up 'year on year' and the increasing yield simply falls off that, doesn't cut it with me. Sure I would like it to be true. But I like to invest on proven results. And if the real results can be shown to be better than what has been achieved in the recent (five year time-frame) past, then I will take that as a bonus. But I will not project ever increasing earnings as the basis for my investment case in a utility, even a well run one, like Spark.

The board and senior management have so far kept out of the criminal courts. So I have to assume what they are doing is legitimate, even if I don't follow all the fine detail. But at the back of my mind I still can't shake the belief that it is the 'operational net profit after tax', which is what will drive sustainable dividend income at Spark, and the extra dividends we shareholders are getting over and above 'normalised operational profits' are ephemeral.

In summary, I don't want to base my investment case on getting a perpetual 6.5% gross yield, for Spark to suddenly reveal, a couple of years down the track that 20% of the profit declared since EOFY2020 are 'gerrymandered accounting constructs' and the real underlying yield is only 5.5%. Ever since the Chorus split days, Spark has been shedding assets (think yellow pages and the cellphone towers). I have to think we are nearing or at the end of these 'one off profit boosts'. So the ability to massage the accounts through one offs must have dried up.

I don't want to open the 202x Annual Report, and find the Chairman of the Board's introduction to read
"Ha ha ha, we fooled you shareholders good and proper didn't we!"

So this is why the sniffing must go on. I have to find out for sure if that 'dividend yield' really is real.

SNOOPY

[Snoopy]

'Deferred tax assets and/or liabilities' are always presented as a cumulative total on the balance sheet. I need to present the earnings history in a comparative cumulative format. The table below is the same data presented in post 2122, but in that different (cumulative) format. I use the EOFY2020 as a start point, because we know the imputation credit balance was nil on that date.

Another point to bear in mind is that the imputation credits paid out only need to match or be less than the imputation credits created on 31st March each year. And because the half year ends in December and the full year in June, a 31st March date does not correspond to any of the reference dates in the table below.




Declared Earnings verses Dividends Paid FY2021 & FY2022 & FY2023Cumulative Net Dividend {A}
Cumulative Imputation Credits
Cumulative Declared HY Net Earnings {B}
Cumulative Net Earnings Shortfall {A}-{B}
Cumulative Imputation Credit Shortfall (1)
Deferred Tax Assets (Liabilities)
Cumulative Deferred Tax Assets (Liabilities) from base


Start Point: End of FY2020
$0m
$0m
$0m
$0m
$0m
($61m)


Sub Total (HY2021 balance date)
$230m
$89.4m
$147m
$83m
$32m
($54m)
$7m


Sub Total (FY2021 balance date)
$461m
$179.2m
$381m
$80m
$31m
($82m)
($21m)


Sub Total (HY2022 balance date)
$694mI
$269.8m
$560m
$134m
$52m
($81m)
($20m)



Sub Total (FY2022 balance date)
$928m
$360.8m
$791m
$137m
$53m
($108m)
($47m)



Sub Total (HY2023 balance date)
$1,162m
$451.8m
$956m
$206m
$80m
$44m
$103m


Sub Total (FY2023 balance date)
$1,414m
$549.8m
$1,254m
$160m
$62m
$55m
$116m


Sub Total (HY2024 balance date)
$1,663m
$646.6m
$1,411m
$252m
$98m
$58m
$119m



Notes

1/ Calculating associated imputation credit 'I' from NPAT: I/(I+NPAT) = 0.28 => 0.28NPAT + 0.28I = I => I = (0.28/0.72)NPAT

-----------------------

Lots of numbers here. The important information to focus on are the two columns in bold.

The first column in bold is the 'imputation credit shortfall'. This is the quantum of imputation credits that have actually been paid out, but which are attached to 'earnings in excess of normalised income'. How is this possible? It is possible if a company already has a store of imputation credits 'in the IRD bank' (so to speak) that are available to 'top up' the imputation credits paid out in relation to normalised operational earnings.

Does Spark have such a top up source available? This is where 'bold column 2' comes in. If the cumulative imputation credits in this second column exceed the corresponding cumulative number in the first column, then there is nothing to stop Spark using those 'imputation credits in the IRD bank' to pay out that imputation credit shortfall. Looking at the table, we can see that this was indeed possible based on the 'column 2 bold balances' exceeding the 'shortfall imputation credits' over the HY2023, FY2023 and HY2024 periods.

Yet as an astute observer, you might say.
"Just a moment Snoopy. If the tale you are telling us is true, that does not explain the earlier dividend periods of HY2021, FY2021, HY2022 and FY2022. In those periods your table clearly shows that the 'imputation credit balance at the IRD' was not sufficient to top up the imputation credit shortfall. In fact in most of those periods the 'IRD bank' imputation credit balance was actually negative. Yet in all of those periods fully imputed dividends still were still paid out in excess of operational earnings. So your theory is a load of codswallop. It doesn't stack up!"

That criticism seems soundly made. But it misses a key point. The available imputation top up only has to balance the imputation credits paid out on 31st March each year. It is quite possible for Spark to top up the imputation credit balance on that date, whereupon once the ensuing dividend is paid, the 'IRD imputation credit account' crashes into the negative again. The point is the critical date for this top up system to work is the 'IRD imputation credit account' balance on 31st March. The 'IRD imputation credit account' balance on 31st March is not declared to shareholders. But we can infer it must have been topped up on that date. Because that is the only way those dividends paid during those HY2021, FY2021, HY2022 and FY2022 periods could have been paid fully imputed.

Some here may be shocked to learn that I am accusing Spark of 'borrowing to pay the dividend' over those four periods. But in these matters Spark has 'got form'. From a post I made in April 2023:



Just noticed this admission in the FY2021 to FY2023 Strategic Outlook, Slide 6.

"(Solid progress made) in the Dividend Sustainable total dividend of 25cps or above that is not supplemented by debt."

This is an admission that as the FY2020 drew to a close, the dividend was being 'beefed up' by taking on more borrowings. The last dividend paid during FY2020 was the interim dividend for FY2020. That dividend was only 75% imputed. Looking back further, the previous four semi-annual dividends were likewise only 75% imputed.

Spark management were obviously aware that 'borrowing to supplement the dividend' was not a sustainable policy.


So there is my explanation of what has been happening with the Spark dividend. My post 2122 was kind of along similar lines. But I mixed up the comparative units that I was meant to be lining up against each other. So I now think my explanation outlined in post 2122 is wrong. I am much happier with the alternative explanation outlined in this post. But please feel free to criticise this explanation, if you think I have screwed up again! In anticipation of this not happening, I think I will sleep well in the dog basket tonight, in the belief that I have finally got to the bottom of this 'phantom imputation credit' problem.

SNOOPY

[Snoopy]

Sometimes tax credits can materialise out of thin air, as a result of selling assets to a new entity in which you become a shareholder. Of course I am describing the Connexa transaction. I have used this 'fact' to explain where a lot of imputation credits paid out over and above what might be expected from 'normalised' income came from. But this doesn't explain where the money for extra imputation credits came from, before the Connexa separation agreement. It is worth keeping tabs on these alternative cash sources, which is the point of this post.

Two sources worth looking at are:
i/ Existing shareholder equity AND
ii/ Net cash gains from derivative transactions.

So what were the changes in shareholder funds on the balance sheet of Spark at EOFY2021, EOFY2022, EOFY2023 and EOHY2024?




Available Drawdown Capital
FY2020
FY2021
FY2022
Summed Incremental Change to EOFY2022
FY2023
HY2024
Summed Incremental Change to EOHY2024


Shareholder Funds
$1,474m
$1,503m
$1,475m
$1m
$1,357m (1)
$1,085m (1)
($389m)


Short Term Derivative Assets
$1m
$12m
$5m
$4m
$1m
$0m
($1m)


Long Term Derivative Assets
$60m
$24m
$13m
($47m)
$27m
$12m
($48m)


Short Term Derivative Liabilities
($5m)
($4m)
($1m)
$4m
($4m)
($4m)
$1m


Long Term Derivative Liabilities
($156m)
($91m)
($77m)
$79m
($94m)
($75m)
$81m


Total Derivative Assets Only



$40m


$33m



Overall Total



$41m


($356m)




Notes

1/ Net earnings for FY2023 are quoted as $1,135m. This the figure that flows through to the increase in shareholder equity. But that figure
includes a $583m contribution from the Connexa transaction. The object of this exercise is to follow the change in equity excluding that transaction. This will allow us to determine the equity flow in the underlying business, assuming that transaction did not take place. Thus we are removing any effect of the Connexa transaction 'papering over' any leakage of shareholder capital were it not for this one off event.

The adjusted shareholder equity for FY2023 and HY2024 is therefore recorded as follows:
FY2023: $1,940m - $583m = $1,357m
HY2014: $1,668m - $583m = $1,085m

---------------------------------------

SNOOPY

[Snoopy]

This is the discussion post for the numbers I have calculated and put down in the table in post 4a above.

----------------------

We are discussing two particular points of time, and how Spark managed to pay for their 'fully imputed dividends' at each of those points of time:
a/ The EOFY2022 before the Connexa transaction.
b/ The EOHY2024 after the Connexa transaction.

EOFY2022

Post 2124 shows an underlying $53m shortfall in the tax payments required to maintain the dividends as fully imputed up to this date. But post 2125 shows a positive summed incremental shareholder equity change of $41m at this time point. Strictly, that means there is still an $8m shortfall of cash to fund those fully imputed dividends. But as far as the tax department is concerned, Spark would have until 31st March the following year to make up this difference. Also remember we are talking about Spark here. By the time CEO Jolie Hodson has finished her morning latte on a Monday, that $8m would've already flowed into Spark's bank account in the allotted fifteen minute coffee break. $8m is not big money in Spark corporate terms.

I therefore conclude that Spark would have no problem pumping up their imputation credit account with the IRD by $53m, to allow those dividends paid up from EOFY2020 to EOFY2022 to be fully imputed. I remain conscious that it is just one way of looking at this is to say that most of the extra capital needed to do the 'dividend prop up' has come from revaluations in derivatives at the EOFY2022 time point. And Spark is not a 'derivative trader'. So Spark would have taken out those derivative positions to hedge against known future payments, such as the $500m in foreign domiciled medium term notes that form part of Spark's debt funding package. In my judgement, it would be highly irregular to use these transient changes in the supporting underlying derivative values to fund operational activities. Of course, no doubt Spark would disagree with by interpretation of where this extra capital to fund dividend payments came from. Spark would just say that it was instead funded through pre-approved increases in operational borrowings. This is what happens when you have a 'big balance sheet'. It almost becomes a matter of opinion as to where a particular rise in capital available for deployment comes from. But given any derivative value volatility would be expected to 'net out to zero' by eventual payback time, I am sticking to my view.


EOHY2024

We now move on to the most current declared balance sheet position. This is showing a massive drawdown in shareholder capital of $356m, just to maintain the rate of fully imputed dividends above underlying earnings levels. Of course the real position is not as dire as this, because I have removed the $583m gain booked from the Connexa transaction from the table. So the actual capital position of Spark is entirely healthy. But the Connexa transaction was a one off. The point of my table is that it shows that operationally, in my view, Spark are unable to sustain the fully imputed level of dividend payment that we see today.

Of particular note at the EOHY2024 balance date, is the snapshot valuation of the derivatives at $33m. It is still positive, and some might say on track to zero as we might eventually expect. But it is now very much 'out of the money' in being able to cover the accumulated imputation credit shortfall of $98m (see post 2124) on that date. This means that the increasing imputed dividend is not being covered by an operational increase in EBITDA as management have alluded to (post 2118, bullet point 2), but has instead been funded by the one off Connexa sale. Once again no doubt management would disagree with my interpretation of events. They would point to the big CAPEX spend in data centres, with the future associated contractual demand, and the big spend on 5G to enable future as yet unimagined sources of cashflow for the future supporting the ever increasing EBITDA comment. IOW they are looking through today's operating earnings, using the time the Connexa sale has given them for improving underlying operating earnings and they are seeing only the blue skies ahead. I am actually very respectful of current management, and I believe they have a very good chance of delivering on their dreams. BUT predictions can be notoriously uncertain - especially about the future.

To me what is happening is akin to a New Zealand Cricket test match, where Kane Williamson is due to take up his position at the crease for NZ, when he drops the comment:
"Actually I am New Zealand's greatest ever batsman. My record stands for itself. So actually I do not need to go out and bat, because statistically we know what the result will be."

To which I would say, "Actually Kane you do need to bat. You can't just rely on yesterday's projections to accumulate your score in present day time." Likewise Spark has to get their own 'runs on the board' to make their earnings projections come true. And Microsoft and AWS in datacentres, and OneNZ and 2degrees in mobile, are there to make getting those incremental 'runs on the board' as awkward as possible.



Summary Position

I believe that since 2020, Spark have been massaging their cashflows in a way that creates the impression of gently increasing fully imputed dividends. There have been some deft moves with capital, and a well thought one off transaction that have allowed Spark to present this very favourable dividend picture to shareholders. But current operational earnings do not support this dividend flow picture. Capex initiatives have put Spark in a position where this favourable dividend position could realistically become reality. But hope, in itself, is not a successful sharemarket strategy, without the execution to 'back it up'. And execution has to be earned, not assumed. A fully imputed dividend at today's levels should not be taken as a given going forwards. Any investor chasing yield, should allow a suitable discount factor on their share price purchase to reflect the reality of future dividend uncertainty.

SNOOPY

discl: hold SPK

[Snoopy]

Buy on the dips and hang in there for the dividends. That is basically what I have done. The liquidity gives you a ready exit should you require it. Personally I have never sold any SPK, even at what I feel might be cyclical highs. Because I am having trouble finding alternative investments that I understand that are selling at a discount to fair value.

As for 'never really going to be a money maker', well that depends on your time-frame and outlook. If I can round up a few Spark shares and get a 6.5% (or a bit better) gross yield, then I am very happy with that. I can't see any real evidence that Spark will give you an 'investment home run' in the foreseeable future. But 'stealing a base' here and there for a more modest (and less liable to be struck out) return I can cope with, and appreciate. For me an investment in Spark is almost a bond proxy. I haven't invested in bonds for quite a few years now as I prefer investments like this to be part of my 'insurance policy' against portfolio volatility. A return that gives a good premium to bank interest rates without too much risk.


I was trawling through some old posts today. When I got to the one above I thought "That guy sounds really sensible." Then I looked at the poster name and found out "That guy" was me! LOL!

I really wanted to buy some more PGW shares today. But because of my self imposed investment rules, I was not allowed to, until I had bought something else first. And that has lead me here!



From an operational perspective Spark is a very stable company. So I think a 6.5% gross interest return on your shares bought, in today's slightly less high interest rate environment, would still be fair. The five year historical average gross dividend received by shareholders from Spark was:

175.35 / 5 = 35.07c

The capitalised dividend value of Spark (fair value) is therefore: 35.07c/0.065 = $5.40

Of course no self respecting value investor would target 'fair value' as a price purchase target. Value investors want a discount! For a utility type investment like Spark I think a discount of 10% is reasonable target. So I am setting my target purchase price at $5.40 x 0.9 = $4.86. With the share closing at $4.76 on Friday, 'Ring ring'?


At under $4.70. I was happy to 'answer the call' and pick up a few more Spark shares today. I cautioned investors about paying too much for Spark shares in my post 2126, with the future yield uncertain. But $4.70 represents a 13% discount to the capitalised dividend fair value target price of $5.40, that would have lock in that 6.5% gross yield I was after. Or put another way, my modelling suggests a gross yield of 7.5% at $4.70. That has to be value, and a sufficient discount to mitigate my income uncertainty risk. Especially when the latest Spark SPF600 5.45% bonds are currently trading at around 5.4% on the secondary market. Why would you want to own Spark bonds when the yield offered by the Spark shares is a full two percentage points higher? To me that just seems unfathomable! But I suppose that is why I am a 'share guy' and not a 'bond guy'.

SNOOPY

[Mrbuyit]

Hi Snoopy,

Can one assume that you are reasonably sure that SPK are not burning the furniture?

It kind of sounded like your were suggesting this in one of your earlier posts, but maybe I got that wrong..

[Snoopy]

Hi Snoopy,

Can one assume that you are reasonably sure that SPK are not burning the furniture?


Nope. My investigations would suggest that Spark have done exactly that. But fortunately the Connexa fire truck arrived, and the blazes were smothered. The company even got a bonus from the Connexa Fire truck people for being so 'positive' about their greedy consumption that lead to the blaze in the first place. How good was that?



It kind of sounded like your were suggesting this in one of your earlier posts, but maybe I got that wrong..


It sounds like you got my message loud and clear. But like many things in business, this is not totally a black and white issue.

a/ IF Spark are paying out more than they earn from underlying normalised operations, BUT
b/ There is a good chance that capital investments made during this period will allow Spark to earn more than they have earned in the past, which will support the future dividend at current levels
c/ THEN that is good news for shareholders.

But like all forecasts of the future, there is execution risk. Personally I believe Spark show a good chance of 'pulling it off'. But to account for the execution risk, I believe that as an investor, you should choose a discount on the price you are willing to pay for Spark shares that are promising to generate that 'forecast future income'.

In my judgement, a 6.5% gross dividend return is a reasonable enduring expectation from an established utility market player like Spark. While the SPK share remains below $4.70 you are actually buying more than a 7.5% gross return on your Spark shares. I judge that to be a sufficient discount to allow for the execution risk of Spark's business plans going forwards. But I don't want to force my expectations of a reasonable return, nor how much they should discount any purchase plan, on other investors. Everyone here has to make their own decisions on where they lie on this risk/return spectrum. And that will determine the price another investor will be prepared to pay for Spark shares, which may be more or less than my SPK share price value choice.

SNOOPY

[Snoopy]

This is a little exercise I like to run on all my companies just to check they are not overloaded with debt. MDRT is the answer to the question:

"How many years would it take to repay your borrowing debt if you decided to repay that debt by pouring all this years net profit into debt repayment, and continued to do the same in subsequent years?"

In other calculations I have been concerned with 'normalised profit', as I am concerned with sustainable earnings trends. However in this case I need the recognised profit from all sources, as determined by current accounting standards. For FY2022 that was $410m.

The total long and short term debt at Spark at EOFY2022 balance date was $1,526m (p108 AR2022). From that figure I like to take off the balance sheet cash balance of $71m. So at EOFY2022, for Spark:

MDRT = ($1,526m-$71m) / $410m = 3.55

My 'rule of thumb' is that any MDRT between 2 and 5 represents a 'medium level' of debt. 3.55 is right in the middle of that range. Whether that is a good result depends on the kind of company being assessed. Generally if you have a stable cashflows that are not affected too much by business cycles, it becomes more 'capital efficient' for shareholders if you crank the debt up a bit This is exactly the situation that I see Spark in. That means I am quite happy with Sparks debt position.

Conclusion: Pass Debt Test


This is a little exercise I like to run on all my companies just to check they are not overloaded with debt. MDRT is the answer to the question:

"How many years would it take to repay your borrowing debt if you decided to repay that debt by pouring all this years net profit into debt repayment, and continued to do the same in subsequent years?"

In other calculations I have been concerned with 'normalised profit', as I am concerned with sustainable earnings trends. However in this case I need the recognised profit from all sources, as determined by current accounting standards. For FY2023 that was $1,135m. However most of that declared profit ($583m) was from the sell down of Connexa, and a lot of that money went to retire debt. When measuring a company's ability to reduce debt like this, I have to be careful here not to 'double count'. In this case I can't count the profit from the Connexa deal as a measure of how well the company can reduce debt, when that same profit has already been used to reduce the company debt. To get around this I am going to adjust the declared profit by removing the Connexa deal profit from that figure:
Adjusted Declared Profit = $1,135m-$583m = $552m

The total long and short term debt at Spark at EOFY2023 balance date was $1,052m (p119 AR2023). From that figure I like to take off the balance sheet cash balance of $100m. So at EOFY2023, for Spark:

MDRT = ($1,052m-$100m) / $552m = 1.72

My 'rule of thumb' is that any MDRT between 0 and 2 represents a 'low level' of debt. That is a significant change from a year ago and it gives Spark 'options'. A share buyback was announced to ultisise some of the strengthened position. Meanwhile much capital expenditure is going in to building datacentres and a 5G mobile network. This will probably result in debt creeping up again, towards where it was at EOFY2022. But a telecommuniactions company tends to have a stable cashflows that are not affected too much by business cycles. Thus it would become more 'capital efficient' for shareholders if Spark were to crank the debt up a bit going into FY2024

Conclusion: Pass Debt Test

SNOOPY

P.S. As explained above, Spark hasn't wasted any time cranking up their debt again. At EOHY2024 it had risen to $1,587m from just $1,052m six months earlier.

[Snoopy]

When the FY2022 results came out, 'Spark Sport' was very much 'still in the picture' as part of the 'exciting growth story' (at HY2023, Spark exited Spark Sport for a one off write off of $52m). So how did the total of the exciting new growth divisions -at the time- shape up?

P87 of AR2022 is where the true calculation of profitability starts:



Operating Revenuesless Product Costsless Labour Costs (1)
less Other Operating Expenses (1)equals EBITDA


'Other Operating Revenues'$152m$72m$20m
$16m$44m



Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 152/3694 = 4.114%; Labour Cost = 0.04114 x $495m = $20m, 'Other Operating Expenses' = 0.04114 x $381m = $16m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.04114 x $520m = $21m

EBIT= EBITDA - DA = $44m - $21m = $23m

The interest charge against 'Other Revenue' = 0.04114 x [$26m - $74m] = -$2m. So underlying Net Profit After Tax is:

NPAT = 0.72(EBIT - I)= 0.72($23m-$2m)= $15m

On page 89 of AR2022 we learn "Included in 'Other operating revenues' is revenue from Qrious (Artificial Intelligence, data and analytics), Internet of Things, Spark Sport, Connect 8 (the construction contractor, now fully brought back in house by buying out the Electra shareholding) and exchange building sharing arrangements." I had previously assumed this category included 'Spark Health' as well. But it could be the Spark Health referred to as a promising potential future revenue business unit has yet to start from a zero base.

Whatever, the NPAT estimate for all those promising future growth initiatives looks to have improved by 50%, even if the overall contribution to Spark profit remains small.


I have expressed some doubts on where growth in the operational business at Spark will come from, that is needed to support the current level of fully imputed dividend payments. To that end the 'growth arm' of Spark, captured under 'other revenue', will play a big part. So how is this 'other revenue' growth arm of Spark going?

At HY2023, Spark exited Spark Sport for a one off write off of $52m. So how did the total of the exciting new growth divisions over 2023, -including Spark Sport when it was a going concern - shape up?

P97 of AR2023 is where the true calculation of profitability starts. 'Other revenue' includes revenue from mobile infrastructure, Qrious (Artificial Intelligence, data and analytics),, the Internet of Things, Spark Sport (discontinued mid year), exchange building sharing arrangements and for the first time MTTR (digital identification start up). Connect8, a servicing and installation arm of Spark that was bought back in house in FY2022 has now been amalgamated with the Entelar business unit. Entelar is not listed as being part of 'Other Revenue'.

The much talked about business unit 'Spark Health' is not mentioned either. I therefore have to assume that 'Spark Health' is a grouping for customer service reasons, but for reporting purposes is distributed across many reporting segments. So there are no 'Spark Health profit figures' per se.
My assumption here was subsequently confirmed in HYR2024 on p9:
"Health results are included across a range of product categories."



Operating Revenuesless Product Costsless Labour Costs (1)
less Other Operating Expenses (1)equals EBITDA


'Other Operating Revenues'$241m$110m$32m
$28m$71m



Notes

1/ 'Labour Costs' and 'Other Operating Expenses' are estimated in fractional proportion (f) to the percentage of revenue turned over by the 'Other Operating Revenues' business unit.

f= 241/3875 = 6.219%; Labour Cost = 0.06219 x $511m = $32m, 'Other Operating Expenses' = 0.06219 x $456m = $28m

-------------------


EBITDA is a good proxy for cashflow. But barring some trunk transmission assets, most of the equipment at Spark is not long lived. Indeed there is significant investment now replacing the old PSTN telephone system and continuing the 5G mobile roll out. In my assessment, this means EBIT is the more important measure.

Depreciation & Amortisation ('Other Revenue') = 0.06219 x $504m = $31m

EBIT= EBITDA - DA = $71m - $31m = $40m

The interest charge against 'Other Revenue' = 0.06219 x [$32m - $99m] = -$4m. So underlying Net Profit After Tax is:

NPAT = 0.72(EBIT - I)= 0.72($40m-$4m)= $26m

Whatever, the operational NPAT estimate for all those promising future growth initiatives looks to have improved by 73% year on year, even if the overall contribution to Spark profit remains small. But it is a bit hard to compare these figures with the similar numbers generated in FY2022 (see quoted text), because the categories of 'Other revenue' have subtly changed, and will be changing again for FY2024.

From HYR2024 p9
-------------------------
Spark has reclassified the comparative segment results to:
• Redistribute certain revenues between two new categories IT products (previously cloud, collaboration, managed data and networks) and IT services (previously service management and security
• Move Qrious, Internet of Things, and MATTR from other products into a new high-tech category
• Split data centres out from cloud, and split co-location out from other products to create a combined data centres category.
-------------------------

SNOOPY

[Snoopy]

Financial YearLabour ExpenseFinance Expense


2018$513m$77m


2019$475m$85m


2020$511m$94m


2021$491m$81m


2022$495m$74m



The table above shows labour expenses have been held down, and interest costs are at cyclical lows. But I would expect upward pressure on both these cost staples as we look to FY2023. Growth initiative research (post 1982) does not give any hint of a significant boost in top line revenue going forwards. Nevertheless mobile service revenue growth continues to exceed expectations, which largely covers the 'new class' growth initiatives and cloud services not performing to expectations


Part of the ability of a telecommunications company like Spark to grow profits, is their ability to continually take out costs. So how is Spark doing?
I foretold pressure on interest and labour costs (despite the ongoing trend to automation) in the Spark accounts for 2023. And this is exactly what has happened.



Financial YearLabour ExpenseFinance Expense


2018$513m$77m


2019$475m$85m


2020$511m$94m


2021$491m$81m



2022$495m$74m


2023$511m$99m



2xHY2024$558m$126m




New category growth initiatives (post 2131) show an incremental NPBT gain of $36m over FY2023. This has been more than wiped out by the increase in labour and finance expenses over the same period. Spark's 'new ventures' are not looking like the key for the company boosting earnings. Nevertheless mobile service revenue growth continues to exceed expectations, and the investment in data-centres is earnings positive. To date this more than covers the 'new category class' growth initiatives not performing to expectations. But it is a competitive market out there, both in mobile services and data-centres.

Cost control projections for FY2024 (I have simply taken the costs for HY2024 and doubled the figures) are not looking good. But CEO Jolie Hodson was very clear at the half year briefing that the 'cost out program' is more than on track. At this point I am giving our CEO the benefit of the doubt. But all will be revealed at financial year reporting time.

SNOOPY

[Snoopy]

Product Category
Operating Revenue (FY2023)Product Margin (FY2023)Product Margin %ge (FY2023)
Operating Revenue (FY2019)Product Margin (FY2019)Product Margin %ge (FY2019)


Mobile
$1,470m (+15.7%)$984m66.9%
$1,271m$775m61.0%


Voice
$231m (-52.5%)$133m57.6%
$486m$310m63.9%


Broadband
$626m (-8.61%)$298m47.6%
$685m$344m50.2%


Cloud, Security & Service Management
$436m (+9.00%)$328m75.2%
$400m$327m81.8%

/
Procurement and partners
$584m (+60.0%)$67m11.5%
$365m$43m12.3%


Managed Data, Networks & Services
$287m (+45.7%)$132m46.0%
$197m$104m52.8%



Other Operating Revenues
$241m (+111.4%)$131m54.4%
$114m$51m44.7%



Total
$3,875m (+8.00%)
$3,588m




FY2019 was the year before any Covid-19 revenue effects took hold. I can see the product categories with the highest 'Product Margin' percentage over FY2023 were:

1/ 'Cloud, Security & Service Management' ' and
2/ 'Mobile'.

The annual report does not do a descriptive 'product category' report to back up the numbers. But I am curious to know the distinction between 'Cloud, Security & Service Management' (+9% revenue) and 'Managed Data, Networks & Services' (+46% revenue). I am thinking the former is 'off the customer premises' while the latter is 'on the customer premises'. But with the ever improving cloud, I imagine such a distinction, if it exists, must be getting blurred. I would have expected 'Cloud, Security & Service Management' would be growing the faster of the two. Which just shows how little I know about this industry, because the opposite happened. Product margin percentages were down five points for both, despite what I am imagining is increasing scale. The effects of competition? Nevertheless, there remains good money to be made in this space.

I find it interesting that if you add the mobile and voice revenues together for the same year, the totals come out to a similar amount (a 3% decline). One way of interpreting that would be to say that 'mobile' is the direct replacement for 'voice' (the old PSTN system), in usage, but also in earnings terms. Despite the rapid decline in revenue from voice (-52% over five years), the percentage product margin has only declined by six percentage points. And legacy 'voice' remains the third highest percentage product margin grouping that Spark sells.

I was very surprised to see revenue from broadband actually decline over the five years. Yet management talk at result briefings would suggest that Spark is more interested in 'running a steady ship' rather than growing this aspect of the business. This is probably related to the product margin percentage for fibre broadband being low in comparison to other front line product group offerings. IOW it makes sense to put your effort into selling product with better margins. Spark have been running a campaign to try and get more 'fixed broadband customers' (those wholesaled from the Chorus network) onto the Spark owned 'mobile broadband network'. If 'mobile broadband' customers are being product grouped under 'mobile' not 'broadband', then this could explain the 'broadband' product line decline. It is notable that 'mobile' is the only specifically delineated product classification to increase its product margin percentage over the comparative five years.

The lowest margin product classification is 'procurement and partners'. This isn't surprising as it basically means picking up someone else's product or service and 'on selling' it. Mobile phone handset sales would be one example. I don't know if the product costs here include all the mall and main-street 'Spark' retail shop rental costs dotted around the country. But I expect they might. The margin may not have jumped. But revenue over the five years most certainly did, by 60%.

'Other operating revenues' showed good improvement. But as a catch all category for 'other activities', I suspect the composition of this product category has changed over the years. So in this instance, I am not sure if it is meaningful to compare figures across the five years.

Overall revenue growth has been 8.00% (that is total, not annual) over five years, while normalised operating profit growth was 6.78% (total not annual) over the same period. You can see that Spark is not a growth investment per se, (although it has performed well on an international comparative against other established telecommunications retailers). Then again, you are not paying a large growth premium to own the shares either. So where does Spark sit on the investment prospect line up? If you want to own a good income paying shares, that will pay you that income across the business cycle, then I would say Spark is a good one to form a cornerstone of such a portfolio.

SNOOPY

[Snoopy]

This is a comparison between 3 methods of measuring net profit after tax. The first one, most quoted in the glossy Spark presentations is 'Net Profit After Tax'. This is recorded in this table below under the monicker 'Net earnings'. This is how the 'often highlighted in presentations' NPAT is described in Spark's 'Statement of Profit and Loss and Other Comprehensive Income'.

Nevertheless in any year, there are often transactions or expenses that are 'one offs', that take away from the general picture of how the core of the business is doing. As an investor, I look for repeatable results. So I like to look through these 'one offs', so that I can get a better understanding of long term earnings trends. To enable me to do this, I calculate something I call 'normalised earnings', which is the second NPAT measure that I have tabulated.

The third NPAT measure is called 'Total Comprehensive Income' (TCI). This income measure takes 'Net Earnings' but further incorporates changes in values of hedge contracts based around currency swaps and interest rates swaps. Spark is partly financed by overseas capital, which is borrowed at overseas interest rates over period(s) of several years. Hedging contracts can provide certainty of NZ dollar denominated interest payments while these loans are outstanding, and certainty on the NZ dollar capital repayment that will ultimately be required to pay back loan capital at the end of each overseas loan term. Nonetheless, 'annual reporting' is required to reflect fair market values of these contracts should they be suddenly and prematurely cancelled. These annual adjustments are required to be incorporated in annual profit figures by NZ accounting standards, despite there being no plans by Spark to terminate these arrangements early. Typically these annual adjustments are volatile in size and may be positive or negative. This is why TCI is a more volatile measure of net profit than the other two methods I have described. To further add to the volatility, equity investments in companies initiated by Spark management, - as measured by a change in market value of such investments over a year - , are also incorporated into the TCI profit calculation.



Year
Normalised NPAT
Total Comprehensive Income (TCI)
Shares EOFY
Normalised eps (tax paid)
Net Earnings ps (tax paid)
TCI ps (tax paid)
dps (tax paid)
EOFY NTA


FY2021:
($384m - 0.72($28m - $16m) ) = $375m
l$354m
1867m
20.1cps
20.6cps
19.0cps
25.0cps
80.5cpsone



FY2022:
($410m - 0.72($26m) ) = $397m
$427m
1872m
20.9cps
21.9cps
22.8cps
25.0cps
78.8cps



FY2023:
0.72x($1152m-($583m-$54m)) - 0.72($33m) = $425m
$1,093m
1845m
23.0cps
61.5cps
59.2cps
26.0cps
105.1cps



HY2024:
$157m-0.72($17m+$2) = $143m
$131m
1815m
7.9cps
8.7cps
7.2cps
13.5cps
92.0cps







Total



71.9cps
112.7cps
108.2cps
89.5cps




Notes

1/ Normalised earnings = Net Earnings (+/-) One off Adjustments. Normalisation details are in post 2073, and in note 5 below.
2/ Normalised eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)
3/ Dividend payments recorded are those paid during the financial year in question (not dividends declared in that financial year).
4/ Gross dividend payments I have calculated in post 1968. After tax dividend figures are the respective gross numbers multiplied by 0.72.
5/ Gains of $17m of property plant and equipment sales and $2m on lease changes have been removed from the declared HY2024 profit.

--------------------------

Looking at this 'three year and one half year picture', (the time from EOFY2000 where we know for sure the imputation credit balance of Spark was zero): The cumulative dividend is straddled between 'cumulative normalised income' (24.4% above this) and 'total cumulative comprehensive income' (20.9% below). This means the dividend payments have been more than a shareholder might reasonably expect. But well down on what the company can afford to pay. The principal reason for this is the large 'one off' profit of $583m (31.6cps) from the Connexa (cell phone tower) sell down. Take that away and the dividend payments look anything but sustainable.

You may be wondering how the asset backing per share fell so dramatically between EOFY2023 and EOHY2024 (by the total value of the dividend paid), when 'positive earnings' over the period should have added to that net asset value. The reason is this 'missing capital' was spent on share buybacks which are not recorded in the table.

The one off Connexa sale has certainly provided a lot of capital to paper over some broken shareholder growth dreams (the most recent being the demise of Spark Sport). That Connexa deal even provided a deferred income tax asset. That means that Spark did not have to pay as much tax up front going forwards to reap the imputation credit benefits of that tax. The story behind increased sustainable earnings is that money spent so far in data centres and particularly on the roll out of 5G will start to earn an investment return in the near term. Personally I remain skeptical about these 'build it and customers will come' earnings projections. Everything like this has execution risk. The way I read my table 'poor execution' could lead to the dividend falling by 20% as the cushioning effect of the Connexa sell down flows through.

That is a pretty negative end to my overview of the Spark dividend situation. Readers may be wondering why I have just topped up my Spark shareholding if I think this way. An unsaid assumption behind my 'capitalised dividend valuation model', that determined the fixed the price I was prepared to pay for Spark shares, is that you have to trust management. If management are paying out a dividend at a certain rate, then you have to trust that there is an 'operational business plan' to justify such a level of payment. It is usually management who are in the best position to judge this. Trusting management is the risk that all ordinary shareholders take. An investors trust may end up being misplaced. But this risk factor is why Spark shares at $4.70 are trading on a gross dividend yield of around 7.5%, while Spark SPF600 bond investors with a more certain return profile are only getting a gross market return of 5.5%. For me the extra risk I am taking holding the shares over the bonds is well worth taking, to plug into that higher yielding income stream.

SNOOPY

[Entrep]

Hi SNOOPY just wanted to say thanks for all the posts in here, they are excellent and very helpful for me.

[kiora]

https://www.goodreturns.co.nz/article/976523100/a-possible-reason-for-the-recent-weakness-in-ebos-and-spark-share-prices.html?utm_source=GR&utm_medium=email&utm_campaign=GoodReturns+Market+Report+for+30+Apr+ 2024
"Forsyth Barr estimated that a Spark share price of below $4.80 between the 17th and 30th of April would likely trigger the EBOS exit from the ACWI. Funnily enough the Spark share price does indeed slump below that level during that period. We cannot know for sure but if you were running an arbitrage hedge fund a possible trade would be to short sell EBOS now in the expectation of buying it back cheaper when the 9.7 million of index selling hits the market. But to make sure EBOS does leave the index, the arbitrage hedge fund also sells shares in Spark to contribute towards a weaker share price."

[see weed]

https://www.goodreturns.co.nz/article/976523100/a-possible-reason-for-the-recent-weakness-in-ebos-and-spark-share-prices.html?utm_source=GR&utm_medium=email&utm_campaign=GoodReturns+Market+Report+for+30+Apr+ 2024
"Forsyth Barr estimated that a Spark share price of below $4.80 between the 17th and 30th of April would likely trigger the EBOS exit from the ACWI. Funnily enough the Spark share price does indeed slump below that level during that period. We cannot know for sure but if you were running an arbitrage hedge fund a possible trade would be to short sell EBOS now in the expectation of buying it back cheaper when the 9.7 million of index selling hits the market. But to make sure EBOS does leave the index, the arbitrage hedge fund also sells shares in Spark to contribute towards a weaker share price."
Does that mean there could be a rebound in Spark sp after EBOS is removed. Have been buying up SPK in last 4 weeks just in case.

[Sideshow Bob]

Tis the season......

https://www.nzx.com/announcements/430555

Spark reduces FY24 EBITDAI guidance as tough trading conditions intensify

Spark New Zealand (Spark) today announced it is reducing FY24 EBITDAI guidance from $1,215-$1,260 million to $1,170-$1,210 million, as challenging trading conditions intensified in some parts of the business. There is no change to FY24 capital expenditure and dividend guidance.

At Spark’s first half results the Company noted weaker demand in the enterprise and government market, which impacts Spark’s IT revenues. Since the half, public and private sector spending cuts have deepened, and Spark has seen significantly reduced demand in IT service management and professional services and delays to planned digital transformation projects.

At the same time, while mobile service revenue and broadband performance remains in line with expectations, sales of mobile devices and accessories have been softer than expected as high interest rates and cost-of-living pressures dampened consumer spending.

While Spark has maintained strong cost discipline in an inflationary environment, the material deterioration in outlook for IT revenues, combined with subdued market conditions more broadly, has resulted in reduced FY24 EBITDAI outlook.

In line with these changes, Spark is accelerating its SPK-26 Operate Programme to bring efficiency benefits online faster. Strong progress has been made on the Company’s operating model redesign, which is driving greater efficiency and rebalancing labour investment to changing growth profiles across the business. This work will continue alongside broader efficiency initiatives to mitigate the impact of softer trading conditions.

Spark Updated FY24 Guidance1

FY23 Actual
EBITDAI $1,193m2
Capital expenditure3 $515m
Dividend per share Total 27.0 cps (100% imputed)

FY24 Guidance Updated

EBITDAI $1,170m-$1,210m
Capital expenditure3 ~$510m-$530m
Dividend per share Total 27.5 cps (100% imputed)

FY24 Guidance Prior

EBITDAI $1,215m-$1,260m
Capital expenditure3 ~$510m-$530m
Dividend per share Total 27.5 cps (100% imputed)

[winner69]

I’m looking forward to Snoopy’s view on this downgrade ….esp the segment analysis and costs

[Snoopy]

I’m looking forward to Snoopy’s view on this downgrade ….esp the segment analysis and costs.


No real surprise in the slowing of new handset sales in the consumer market, with a cost of living crisis going on. It is no real hardship to own a mobile phone for more than two years, despite some liking to be seen with or have the latest and greatest.

I reckon where Spark is hurting most is probably 'Spark Health'. 'NZ Health' is the largest government department. In the last half year report Spark admitted that 'Spark Health' had not only stalled but was not a real division anyway. It was just all the old health board customers grouped together for their ordinary needs to look fashionable for Spark shareholders (OTOH 'Telstra Health' across the ditch is a real division with its own IP). Nevertheless the increasing digitisation of health is an inexorable path forwards. And I think any downgrades in EBITDA from 'Spark Health' or indeed any of the other government departments will be 'cashflow postponed' rather than 'cashflow lost'.

It was good to see the dividend guidance unchanged, even if it does suggest that the dividends promised are not a true reflection of underlying earnings. But any regular readers of this thread will already know that! In response to the EBITDA downgrade, Spark has promised to up the sackings of their staff. Good to hear.

Last year's EDITDA for FY2023 without a poke in the 'I': $1,193m2. New forecast EBITDAI range $1,170m-$1,210m. Prediction is therefore for a flat result, if you ignore interest rates going up (as EBITDA does).

SNOOPY

... who is mulling over this downgrade as another potential share top up opportunity

[ronaldson]

There seem to be an awful lot of "top up opportunities" on the NZX just now.

[Ferg]

In the last half year report Spark admitted that 'Spark Health' had not only stalled but was not a real division anyway. It was just all the old health board customers grouped together for their ordinary needs to look fashionable for Spark shareholders....[snip].... Nevertheless the increasing digitisation of health is an inexorable path forwards.

I'm curious what the bold part means to you and in particular how this differs from previous systems and/or processes in the CHE's/DHBs. Do you have any further info on that?

[Baa_Baa]

And I think any downgrades in EBITDA from 'Spark Health' or indeed any of the other government departments will be 'cashflow postponed' rather than 'cashflow lost'.

Don't hold your breath Snoopy, the number of cancelled digital projects across government ministry's, agencies and departments is substantial. Not postponed. Cancelled, as in stopped or not going ahead at all.

[Jaa]

Don't hold your breath Snoopy, the number of cancelled digital projects across government ministry's, agencies and departments is substantial. Not postponed. Cancelled, as in stopped or not going ahead at all.

Interesting, in your opinion are these the dog projects that would have failed anyway or is it indiscriminate?

[Baa_Baa]

Interesting, in your opinion are these the dog projects that would have failed anyway or is it indiscriminate?

No, not at all, that are they either the 'dog' projects or that it is indiscriminate. There is a massive 're-prioritisation' exercise going on across all government departments, they look at their current projects (and some services) in flight and projects forecasted in the pipeline and rebalance that against strategic priorities and funding (which all are looking for ~7.5% savings). The winners continue, or stay in the pipeline and the losers literally are shutdown and/or dropped out of the pipeline. The process is ruthless.

No supplier of digital services to government currently is immune to being 'reprioritised'. And, it's not like there are a whole lot of projects or services that are going to magically replace the culled projects and services, because the funding has dried up AND reduced. When they're gone they're gone, finito, end of, along with the revenues to the suppliers who in TOTO make it all happen.

[bull....]

with the xtra email fee's , wonder how many people spark will lose on broadband now ? email for free sort of kept customers loyal you would have thought

[ratkin]

with the xtra email fee's , wonder how many people spark will lose on broadband now ? email for free sort of kept customers loyal you would have thought

I am one of those, a couple of times have considered changing to another company but the idea of losing my emails was what put me off.

[airedale]

I am one of those, a couple of times have considered changing to another company but the idea of losing my emails was what put me off.
The bother of losing my email address because it costs about the same as a cup of coffee once a month. No thanks I will keep mine.

[percy]

The bother of losing my email address because it costs about the same as a cup of coffee once a month. No thanks I will keep mine.

That's how I see it too.

[Jaa]

Interesting article about Spark's data center strategy. Playing to their strengths, an edge strategy should create faster services for customers than competitors like Infratil's CDC, Microsoft or AWS.


Spark's data center strategy comprises both large, centralized data centers such as those in Auckland, Wellington, and Christchurch, alongside Edge locations in regional cities such as Hamilton, Tauranga, and Dunedin.

Spark invests NZ$15m for digital infrastructure in New Zealand (https://www.datacenterdynamics.com/en/news/spark-invests-nz15m-for-digital-infrastructure-in-new-zealand/)

[Ggcc]

Just looking at my Spark plans and One nz seem to be giving some heavy discounts for Broadband and more data on cell phones. Maybe time for a change when the cost of living increases for many.

[Jaa]

No, not at all, that are they either the 'dog' projects or that it is indiscriminate. There is a massive 're-prioritisation' exercise going on across all government departments, they look at their current projects (and some services) in flight and projects forecasted in the pipeline and rebalance that against strategic priorities and funding (which all are looking for ~7.5% savings). The winners continue, or stay in the pipeline and the losers literally are shutdown and/or dropped out of the pipeline. The process is ruthless.

No supplier of digital services to government currently is immune to being 'reprioritised'. And, it's not like there are a whole lot of projects or services that are going to magically replace the culled projects and services, because the funding has dried up AND reduced. When they're gone they're gone, finito, end of, along with the revenues to the suppliers who in TOTO make it all happen.

Considering so many government IT projects fail or get endlessly extended, a 7.5% cull of projects or of project cost is pretty reasonable. Releases resources both internally and externally to make the remaining projects cheaper and more likely to succeed.

Not great for Spark but an opportunity to control costs.

[Snoopy]

I'm curious what the bold part means to you and in particular how this differs from previous systems and/or processes in the CHE's/DHBs. Do you have any further info on that?


I was referring to a comment by CEO Jolie Hodson at the full year for FY2023 Q&A session IIRC, following a slightly disappointing 'Spark Health' result. I imagined it was something to do with integrating health databases nationwide in a process of bringing all the disparate district health board records together. I may be wrong about that. But the basic idea is that you could go to a health specialist anywhere in the country and they would have access to your health records. I am not sure how far along the track this process is.

SNOOPY

[Snoopy]

No, not at all, that are they either the 'dog' projects or that it is indiscriminate. There is a massive 're-prioritisation' exercise going on across all government departments, they look at their current projects (and some services) in flight and projects forecasted in the pipeline and rebalance that against strategic priorities and funding (which all are looking for ~7.5% savings). The winners continue, or stay in the pipeline and the losers literally are shutdown and/or dropped out of the pipeline. The process is ruthless.

No supplier of digital services to government currently is immune to being 'reprioritised'. And, it's not like there are a whole lot of projects or services that are going to magically replace the culled projects and services, because the funding has dried up AND reduced. When they're gone they're gone, finito, end of, along with the revenues to the suppliers who in TOTO make it all happen.


Some emotive language here. Perhaps it is time to step back and look at some facts. As it happens Spark has just become more transparent about all of this by releasing their HY2024 result in a more granulated way that allows shareholders to see exactly how their business units are doing in revenue terms.. From 'note 3' 'Segment Information' in that release.





HY2024HY2023



Mobile
$749m$732m



Procurement & Partners
$339m$319m


Broadband
$309m$313m


IT Products
$261m$254m



Voice
$94m$122m



IT Services
$84m$91m



Hi-Tech (excluding health)
$35m$31m


Data Centres
$19m$13m



Other Products (1)
$68m$71m


Total
$1,957m$1,946m






Notes

1/ Includes mobile infrastructure, exchange building sharing arrangements and Spark Sport (in H1 FY23).

-------------------------

From this we can see that IT services revenue did fall substantially, by 7.7% comparing first half FY2023 with first half FY2024. But looked at in context of over all Spark revenue it is a fall of 0.4%. That is margin of error stuff, which you can think of as being replaced by a rise in revenue at data centres. I know Spark like to crow about their high tech accomplishments, But building IT systems is really a sideline for them. Taking the bigger picture view, whatever government departments (or private enterprise) do with their build out of IT contracts, cancelled, postponed or otherwise, effectively makes no difference to the Spark result.

SNOOPY

[mondograss]

I was referring to a comment by CEO Jolie Hodson at the full year for FY2023 Q&A session IIRC, following a slightly disappointing 'Spark Health' result. I imagined it was something to do with integrating health databases nationwide in a process of bringing all the disparate district health board records together. I may be wrong about that. But the basic idea is that you could go to a health specialist anywhere in the country and they would have access to your health records. I am not sure how far along the track this process is.

SNOOPY

Ultimately, not very far along at all.

There are two concepts here, that of a PAS (Patient Admin System) and that of an EMR (Electronic Medical Record). We don't really have EMR's here in NZ because we have the NHI which was world leading with a single identifier and a national database of demographic, next of kin, allergy information etc. So there hasn't been the driver to go to an EMR. But the NHI itself is slowly upgrading, adding new functionality which will allow it to function as more of an EMR. Which is ultimately what you're after. Eventually they might reach a point where they hit the limits of what they can do with it and just migrate to a proper EMR, but I would expect that to be some way off.

A PAS is a different beast, it's where you admit and discharge a patient, record their diagnoses, procedures and manage clinics, dietary requirements and so forth. Obviously some of that information would flow to an EMR, but a PAS is much more intended for day to day administration of a hospital.

So most DHB level patient records across NZ use one of two PAS software systems WebPAS and i.PM, both of which come from the same vendor https://www.dedalus.com/anz/ (but not all, Auckland and Canterbury use something else). As DHB's start to work as regions they are likely to consolidate their databases regionally where they use the same version of the same product, if only to save cost and complexity. There may also be a need to migrate some DHB's to a different product if it's more widely used in their region. Over time this might result in all the regions using the same product, and regions at least sharing the same database.

Needless to say, all this is likely to take years to accomplish and we live in hope that the health system won't be restructured again in the meantime.

[Snoopy]

Ultimately, not very far along at all.

There are two concepts here, that of a PAS (Patient Admin System) and that of an EMR (Electronic Medical Record). We don't really have EMR's here in NZ because we have the NHI which was world leading with a single identifier and a national database of demographic, next of kin, allergy information etc. So there hasn't been the driver to go to an EMR. But the NHI itself is slowly upgrading, adding new functionality which will allow it to function as more of an EMR. Which is ultimately what you're after. Eventually they might reach a point where they hit the limits of what they can do with it and just migrate to a proper EMR, but I would expect that to be some way off.

A PAS is a different beast, it's where you admit and discharge a patient, record their diagnoses, procedures and manage clinics, dietary requirements and so forth. Obviously some of that information would flow to an EMR, but a PAS is much more intended for day to day administration of a hospital.

So most DHB level patient records across NZ use one of two PAS software systems WebPAS and i.PM, both of which come from the same vendor https://www.dedalus.com/anz/ (but not all, Auckland and Canterbury use something else). As DHB's start to work as regions they are likely to consolidate their databases regionally where they use the same version of the same product, if only to save cost and complexity. There may also be a need to migrate some DHB's to a different product if it's more widely used in their region. Over time this might result in all the regions using the same product, and regions at least sharing the same database.

Needless to say, all this is likely to take years to accomplish and we live in hope that the health system won't be restructured again in the meantime.


Great insight there mondograss. I hadn't appreciated the difference between the PAS (Patient Admin System) and the EMR (Electronic Medical Record) systems before. Across the ditch 'TelstraHealth' is deep into software development where they sell their own in house IP as part of the 'health solution'. Nothing like that is happening at Spark, where they just adapt proprietary software (as I understand it). I am not saying this is a good or a bad thing. I am just noting the two different approaches.

I suspect what you are talking about mondograss, is what Jolie Hodson was talking about when she said that the NZ Health system would have a need to continue to digitise, be that sooner or later. Whether Spark will be a major beneficiary of that process is open to question. It could be one of the US database giants like Oracle swoop in and do the whole thing, while Spark are left to sweep up the operational crumbs. I am relaxed about which way the 'digitisation of NZ health' continues either way.

SNOOPY

[mondograss]

Great insight there mondograss. I hadn't appreciated the difference between the PAS (Patient Admin System) and the EMR (Electronic Medical Record) systems before. Across the ditch 'TelstraHealth' is deep into software development where they sell their own in house IP as part of the 'health solution'. Nothing like that is happening at Spark, where they just adapt proprietary software (as I understand it). I am not saying this is a good or a bad thing. I am just noting the two different approaches.

I suspect what you are talking about mondograss, is what Jolie Hodson was talking about when she said that the NZ Health system would have a need to continue to digitise, be that sooner or later. Whether Spark will be a major beneficiary of that process is open to question. It could be one of the US database giants like Oracle swoop in and do the whole thing, while Spark are left to sweep up the operational crumbs. I am relaxed about which way the 'digitisation of NZ health' continues either way.

SNOOPY

The trend that Spark is most likely to be a beneficiary of is the movement to the public cloud, of which they are an operator. Data sovereignty rules have thus far prevented much being moved to public cloud so far simply because the big players internationally didn't have data centers here. Arguably Spark should have pushed harder to capitalise before that changed. But with AWS and Azure both launching NZ sites in the immediate future, they will struggle I suspect to make the big gains and more likely will just pick up bits and pieces around the edges.

Definitely there is a trend towards nationalised systems of various stripes. Medications management (charting what meds you give the patient and when) and electronic pharmacy prescribing\dispensing are two areas where there's a clear case for improvement over manual systems and they might just as well do it nationwide:
https://www.tewhatuora.govt.nz/health-services-and-programmes/digital-health/emedicines-and-the-new-zealand-e-prescription-service/the-emedicines-programme/

This is the psuedo-EMR that's being developed:
https://www.tewhatuora.govt.nz/health-services-and-programmes/digital-health/hira-connecting-health-information/

And you might find this interesting:
https://www.hinz.org.nz/page/eHealthNews

[see weed]

Couldn't resist and bought some on close today. It appears the low for the last 2 days have been on close. That gives me 6.2% yld slightly better than bank. Hopefully it goes down more on every close this week to grab some more. Anyone else buying in at this level or waiting for lower levels.

[Jiggs]

We've used Spark for internet, email and our cellphones for decades. Each month we've paid $60 for 70Gb of internet, $27 and $45 for each of our phones, and will have to pay $5 for email, or about $1600 annually.

We are in the process of shifting to Spark's subsidiary Skinny, and each 4 weeks will pay only $50 for internet, plus $17 and $17 for our phones, with $10 monthly to keep our Xtra emails, a saving of about $400 a year. We are over 65 so we could be cheeky and get 70Gb of Skinny Jump internet for $10 monthly, reducing our costs by another $530.

I can see why Spark's IT profits are dropping.

[Snoopy]

We've used Spark for internet, email and our cellphones for decades. Each month we've paid $60 for 70Gb of internet, $27 and $45 for each of our phones, and will have to pay $5 for email, or about $1600 annually.

We are in the process of shifting to Spark's subsidiary Skinny, and each 4 weeks will pay only $50 for internet, plus $17 and $17 for our phones, with $10 monthly to keep our Xtra emails, a saving of about $400 a year. We are over 65 so we could be cheeky and get 70Gb of Skinny Jump internet for $10 monthly, reducing our costs by another $530.

I can see why Spark's IT profits are dropping.


Interesting observations on the price comparisons between the Spark brand and Spark's budget 'Skinny' brand Jiggs. As a Spark shareholder, I am not pleased to hear about your savings. But I am pleased to hear you are happy to remain under the wider Spark envelope at least! I am rather puzzled by your final sentence though. It sounds like all the business you do with Spark is via their mobile platform. I say that because your internet price and data cap indicates you might be on what Spark calls 'wireless broadband', which I think comes under the mobile product group as well (I am happy to be corrected if this is not the case). But none of this has anything to do with the product grouping that is 'Spark IT'.

Here is what CEO Jolie Hodson said about 'Spark IT' at HY2024 result reporting time:
"In digital services, Spark stabilised its IT market performance, while driving new growth in data centres and high-tech solutions. Interventions to improve IT product performance delivered 3.8% growth in cloud revenue, with increased private and public cloud workloads and the launch of a new hybrid cloud service, CloudIQ. Cloud gross margin grew 7.6% as the cost base was reset, with benefits to continue flowing through in the second half. Overall IT revenues held flat at $345 million, impacted by a slowdown in service management, primarily driven by lower public sector demand."

Then on the 6th May 2024 earnings update:
"At Spark’s first half results the Company noted weaker demand in the enterprise and government market, which impacts Spark’s IT revenues. Since the half, public and private sector spending cuts have deepened, and Spark has seen significantly reduced demand in IT service management and professional services and delays to planned digital transformation projects."

Yet the update goes on to say
"At the same time, while mobile service revenue and broadband performance remains in line with expectations."

These reports would indicate to me that the predicted fall in IT Revenues has nothing to do with yours and others savvyness in finding more economical mobile plans.

SNOOPY

[Entrep]

Anyone else buying in at this level or waiting for lower levels.

Yes I 3x'ed my holding yesterday

[Snoopy]

Couldn't resist and bought some on close today. It appears the low for the last 2 days have been on close. That gives me 6.2% yld slightly better than bank. Hopefully it goes down more on every close this week to grab some more. Anyone else buying in at this level or waiting for lower levels.


I think you are comparing the 'gross yield' from the bank to the 'net yield' from your Spark shares 'see weed'. So you aren't getting 'slightly' more yield from your Spark shares. You are actually getting 39% (1/0.72= 1.3888) more money from those Spark share dividends, based on a 28% marginal tax rate.

If, OTOH, you are on a 33% marginal tax rate, the net interest you would receive on a bank term deposit at an interest rate 'I' would be: 0.67xI

Compare that to the money you would receive from a declared Spark dividend 'D' (tax paid) at the same 33% tax rate: 0.67xD/0.72
Now let's take the special case where the net dividend from Spark 'D' just happens to be equal to the gross dividend 'I' that you might get from a term deposit (IOW in this special case D=I).

(Just as an aside with the immediate historical dividends for Spark of 13cps and 13.5cps (a total of 26.5cps) and a Spark share price of $4.30, this gives a net yield of 26.5/430= 6.2%. Hunt around and you can get 6.2% on a one year term deposit. So my 'special case' example of the net yield from Spark shares being equal to the gross yield on a bank term deposit isn't so far fetched! )

That means the extra income you would be getting from the Spark dividend would be a multiple: [0.67xI/0.72]/[0.67xI]= 1.3888 (again).

That in turn means as a Spark shareholder, even at the higher marginal tax rate, you are still getting 39% more money than you would have got from a bank term deposit, despite the fact that in absolute terms, the net income from your (theoretical alternative) bank term deposit would be lower and your dividend income would likewise be lower (because you are on the higher 33% marginal tax rate).

SNOOPY

[waikare]

I think you are comparing the 'gross yield' from the bank to the 'net yield' from your Spark shares 'see weed'. So you aren't getting 'slightly' more yield from your Spark shares. You are actually getting 39% (1/0.72= 1.3888) more money from those Spark share dividends, based on a 28% marginal tax rate.

If, OTOH, you are on a 33% marginal tax rate, the net interest you would receive on a bank term deposit at an interest rate 'I' would be: 0.67xI

Compare that to the money you would receive from a declared Spark dividend 'D' (tax paid) at the same 33% tax rate: 0.67xD/0.72
Now let's take the special case where the net dividend from Spark 'D' just happens to be equal to the gross dividend 'I' that you might get from a term deposit (IOW in this special case D=I).

(Just as an aside with the immediate historical dividends for Spark of 13cps and 13.5cps (a total of 26.5cps) and a Spark share price of $4.30, this gives a net yield of 26.5/430= 6.2%. Hunt around and you can get 6.2% on a one year term deposit. So my 'special case' example of the net yield from Spark shares being equal to the gross yield on a bank term deposit isn't so far fetched! )

That means the extra income you would be getting from the Spark dividend would be a multiple: [0.67xI/0.72]/[0.67xI]= 1.3888 (again).

That in turn means as a Spark shareholder, even at the higher marginal tax rate, you are still getting 39% more money than you would have got from a bank term deposit, despite the fact that in absolute terms, the net income from your (theoretical alternative) bank term deposit would be lower and your dividend income would likewise be lower (because you are on the higher 33% marginal tax rate).

SNOOPY

Hi Snoopy, would the Imputation Tax Credits have some bearing on your return.?

[see weed]

I think you are comparing the 'gross yield' from the bank to the 'net yield' from your Spark shares 'see weed'. So you aren't getting 'slightly' more yield from your Spark shares. You are actually getting 39% (1/0.72= 1.3888) more money from those Spark share dividends, based on a 28% marginal tax rate.

If, OTOH, you are on a 33% marginal tax rate, the net interest you would receive on a bank term deposit at an interest rate 'I' would be: 0.67xI

Compare that to the money you would receive from a declared Spark dividend 'D' (tax paid) at the same 33% tax rate: 0.67xD/0.72
Now let's take the special case where the net dividend from Spark 'D' just happens to be equal to the gross dividend 'I' that you might get from a term deposit (IOW in this special case D=I).

(Just as an aside with the immediate historical dividends for Spark of 13cps and 13.5cps (a total of 26.5cps) and a Spark share price of $4.30, this gives a net yield of 26.5/430= 6.2%. Hunt around and you can get 6.2% on a one year term deposit. So my 'special case' example of the net yield from Spark shares being equal to the gross yield on a bank term deposit isn't so far fetched! )

That means the extra income you would be getting from the Spark dividend would be a multiple: [0.67xI/0.72]/[0.67xI]= 1.3888 (again).

That in turn means as a Spark shareholder, even at the higher marginal tax rate, you are still getting 39% more money than you would have got from a bank term deposit, despite the fact that in absolute terms, the net income from your (theoretical alternative) bank term deposit would be lower and your dividend income would likewise be lower (because you are on the higher 33% marginal tax rate).

SNOOPY
Thanks Snoopy for all your workings out and calculations. Have just broken half of one of my ASB investments...Savings Pluss = 5% but the other half will now drop back to 2.65% for next couple months. Am going to buy more SPK at this lower level. Hoping to make about 50c on top of divs., but even a 10c to 20c gain plus div is sure better than 2.65% to 5% with ASB. Also have a term deposit at 6.05% for 6 months not to be touched. So now SPK buy buy buy, which I was doing before EBITDAI down grade. Will have a reasonably good buy in order to help under pin the current sp.

[Snoopy]

Hi Snoopy, would the Imputation Tax Credits have some bearing on your return.?


Thanks for that point Waikare. I didn't specifically mention imputation credits. But imputation credits supplied by Spark as part of a dividend payment, represents tax that has already been paid by Spark on the net profits that are being distributed to you as dividends. So when I calculated the multiplication factor above (1/0.72= 1.3888), another way of thinking of this is that I am 'adding back' the imputation credits to calculate what the 'gross dividend was'.

Take the last dividend payment of 13.5cps as an example. The gross dividend that allowed this fully imputed dividend to be paid was:

13.5cps x 1.3888 = 18.75c

We know that:

Net Dividend + Imputation Credits = Gross Dividend

=> 13.5cps + Imputation Credits = 18.75cps
=> Imputation Credits = 18.75cps - 15.5cps = 3.25cps

What I am telling you in a long winded way is that imputation credits were included in my comparative return analysis in post 2162, even though I did not specifically spell out that this was the case. I hope that helps clarify things.

SNOOPY

[Snoopy]

At under $4.70. I was happy to 'answer the call' and pick up a few more Spark shares today. I cautioned investors about paying too much for Spark shares in my post 2126, with the future yield uncertain. But $4.70 represents a 13% discount to the capitalised dividend fair value target price of $5.40, that would have lock in that 6.5% gross yield I was after. Or put another way, my modelling suggests a gross yield of 7.5% at $4.70. That has to be value, and a sufficient discount to mitigate my income uncertainty risk. Especially when the latest Spark SPF600 5.45% bonds are currently trading at around 5.4% on the secondary market. Why would you want to own Spark bonds when the yield offered by the Spark shares is a full two percentage points higher? To me that just seems unfathomable! But I suppose that is why I am a 'share guy' and not a 'bond guy'.


A month later and a profit downgrade on, I have been back buying more Spark shares. Bought my latest parcel at $4.35. That sounds like a real bargain until they closed at $4.29 yesterday. While the expected Spark profit was downgraded, the forecast next dividend was not downgraded. Furthermore the downgrade only bought expected EBITDAI guidance back to the range where EBITDAI for FY2023 sat. So it wasn't a very serious downgrade. I suspect the blamed big IT contracts stalling in a stagnant economy, and all the downstream activity from that, are largely projects postponed rather than projects permanently cancelled.

$4.29 is a 20% discount to my capitalised dividend fair value figure of $5.40. Or put another way, buying today will get you a capitalised gross yield of 8.5%, when I would have been happy with 6.5%! Historically such discounts to fair value for an established utility do not last long. So rather than agonize over a few cents, what is driving my investment buying into Spark at these levels is FOMO. Having said that I still have the powder available to buy some more. But I might give it another month and let the 'dollar cost averaging' play out.

A purely speculative explanation for the SPK share price decline has already been referenced here:
https://www.goodreturns.co.nz/article/976523100/a-possible-reason-for-the-recent-weakness-in-ebos-and-spark-share-prices.html?utm_source=GR&utm_medium=email&utm_campaign=GoodReturns+Market+Report+for+30+Apr+ 2024

We learned this morning that EBOS has been demoted from the MSCI large cap index to the medium cap index. As I write this 'post MCSI announcment', EBO is down another 2%, with Spark off a further 0.5%
.
So if the selling of SPK shares was indeed connected to this 'EBOS index exit', we can now say 'job done'. It might now just be momentum traders carrying the SPK share price a bit lower again. But buying into Spark at these spectacular yields has made me lose all interest in the NZ listed property sector, PIE tax advantages notwithstanding.

SNOOPY

[FatTed]

Snoopy I guess if you wanted PIE tax advantage and Spark you could buy NZX DIV Fund

[SailorRob]

What am I missing here, going through some NZX looking for anything of interest.

SPK...

Revenue flat as the Earth for 10 years

Makes 400 like clockwork every year.

And selling for near 8 billion.

WFT???

Why the hell would you entertain paying anything like that??

Only worth $2. share max.

[ValueNZ]

What am I missing here, going through some NZX looking for anything of interest.

SPK...

Revenue flat as the Earth for 10 years

Makes 400 like clockwork every year.

And selling for near 8 billion.

WFT???

Why the hell would you entertain paying anything like that??

Only worth $2. share max.
Any reason you're looking at NZX stocks? Avoiding FIF if possible?

[SailorRob]

Any reason you're looking at NZX stocks? Avoiding FIF if possible?


Nothing to do with FIF, just generally aware the NZX has gone nowhere in 5 years and that some companies have had 20 years wiped off the share price, so figured I'd have a quick Look. But nothing remotely interesting apart from retirement sector.

The high quality companies you pay for and any hiccup will see them slaughtered.

It's a desolate wasteland.

[Snoopy]

What am I missing here, going through some NZX looking for anything of interest.

SPK...

Revenue flat as the Earth for 10 years
Makes 400 like clockwork every year.
And selling for near 8 billion.

WFT???

Why the hell would you entertain paying anything like that??
Only worth $2. share max.


A sailor wafts into an unfamiliar port. Does a quick walking tour of the streetscape, and thinks he knows more than the locals who have lived there for over a decade. Typical. Sometimes the superficial street view hides what has been going on under the hood. Revenues at Spark may not have changed much over 10 years. But I would argue that in terms of business operations, Spark (or Telecom as it was then) is the most 'transformed' company in the NZX20. Look at the table below of product category revenue to see what I mean:




Product Category
Operating Revenue (FY2023)
Operating Revenue (FY2013)


Mobile
$1,470m (+60.0%)
$921m


Voice
$231m (-51.9%)
$480m


Broadband
$626m (+78.9%)
$350m



Information Technology Services
$723m (+38.2%)
$523m



Other Operating Revenues
$825m (-% Not meaningful)
$1,438m



Australia (AAPT)
$0m (-100%)
$477m



Total
$3,875m (-7.5%)
$4,189m















Net Earnings over respective years
$425m (+78.6%)
$238m



Dividends paid over respective years
26cps (+36.8%)
19cps




Calculation Notes

1/ FY2013 Calling Revenue of $520m. Refer graph p26 AR2013.
2/ FY2013 Mobile Revenue: 1.815m x $35/month x 12 = $760m. Refer graphs p27 AR2013. Better estimate from AR2013 p86$926m-$5m=$921m.
3/ FY2013 Broadband Revenue of $350m. Refer graph p26 AR2013.
4/ 'IT' includes 'cloud security and service management' and 'managed data network and services'. This business unit went under the monicker of Gen-i back then (AR2013 p86)
5/ 'Other Revenue' consists of revenue from equipment sales, dividends and other income, and I believe fixed access charges for the old 'landlines'. However, I believe the composition of what is classified as 'other' may have changed over the last ten years. That is why I am calling the percentage change over ten years 'not meaningful' as I am not sure we are comparing apples with apples.
6/ Net earnings for FY2023 have been adjusted to take out the one off effect of the cellphone tower sale:
0.72x($1152m-($583m-$54m)) - 0.72($33m) = $425m

----------------

Navigating market segment changes such as these does not come easily. Spark has been fortunate to have two very competent CEOs in the face of Simon Moutter and now Jolie Hodson who have navigated the choppy waters of the telecommunications seas for we shareholders. And I mean that on an international comparative scale.

Based on your 'fair value' of $2 Sailor, we shareholders would now be looking at an historical gross dividend yield of:

(26c/0.72)/ 200c = 18%

I can see why even you would get excited at that kind of perpetual return Sailorman. I don't fancy your chances though, not with buying Spark shares anyway.

SNOOPY

[Entrep]

A sailor wafts into an unfamiliar port. Does a quick walking tour of the streetscape, and thinks he knows more than the locals who have lived there for over a decade.

i chuckled

[SailorRob]

A sailor wafts into an unfamiliar port. Does a quick walking tour of the streetscape, and thinks he knows more than the locals who have lived there for over a decade. Typical. Sometimes the superficial street view hides what has been going on under the hood. Revenues at Spark may not have changed much over 10 years. But I would argue that in terms of business operations, Spark (or Telecom as it was then) is the most 'transformed' company in the NZX20. Look at the table below of product category revenue to see what I mean:




Product Category
Operating Revenue (FY2023)
Operating Revenue (FY2013)


Mobile
$1,470m (+93.4%)
$760m


Voice
$231m (-51.9%)
$480m


Broadband
$626m (+78.9%)
$350m


Information Technology Services
$723m (+38.2%)
$523m


Other Operating Revenues
$825m (-% Not meaningful)
$1,599m


Australia (AAPT)
$0m (-100%)
$477m


Total
$3,875m (-7.5%)
$4,189m



Calculation Notes

1/ FY2013 Calling Revenue of $520m. Refer graph p26 AR2013.
2/ FY2013 Mobile Revenue: 1.815m x $35/month x 12 = $760m. Refer graphs p27 AR2013.
3/ FY2013 Broadband Revenue of $350m. Refer graph p26 AR2013.
4/ 'IT' includes 'cloud security and service management' and 'managed data network and services'. This business unit went under the monicker of Gen-i back then (AR2013 p86)
5/ 'Other Revenue' consists of revenue from equipment sales, dividends and other income.


He doesn't 'think' he knows more than the 'locals of over a decade' he knows he does.

These locals you're talking about are the ones who have had ZERO % return for 16.5 years? Apart from a few poxy dividends which inflation has done a number on?

Yes margins have improved and no it's not an awful business but it's FAR too expensive.

Correct me if I wrong but the share price is the same as 1993.

What the Sailor will admit he does not know, is why the hell anyone would own this?

Who in their right mind would choose this over Berkshire?

[SailorRob]

Bringing up the locals who have owned the dog for well over a decade is one of the most crazy admissions you could possibly make.

You shoot yourself in the head right away!

[SailorRob]

I would argue that in terms of business operations, Spark (or Telecom as it was then) is the most 'transformed' company in the NZX20


Like saying the most improved MP in the Labour Party...

And who cares?

It's how much cash they make and what you pat for it - all that matters.

Massively competitive industry and revenues have declined dramatically in real terms.

[MauroNZ]

Nothing to do with FIF, just generally aware the NZX has gone nowhere in 5 years and that some companies have had 20 years wiped off the share price, so figured I'd have a quick Look. But nothing remotely interesting apart from retirement sector.

The high quality companies you pay for and any hiccup will see them slaughtered.

It's a desolate wasteland.

This is not far from the truth, I only follow the market a few times a month and a few companies since 2013. It's funny that you'll struggle to find at least five that have grown 10x or more.

Abroad even niche companies like Ferrari (RACE) do much better.

[Snoopy]

He doesn't 'think' he knows more than the 'locals of over a decade' he knows he does.

These locals you're talking about are the ones who have had ZERO % return for 16.5 years? Apart from a few poxy dividends which inflation has done a number on?


16.5 years ago was 2008. On 31st March 2008 the Spark/Telecom share price was $3.74. So not a great capital return but not zero - it is closer to 40cps. Following that time, there was a period where the share price dipped right down into the low $2 range. Some far thinking investors may have bought a few more Spark back in those dark days to lower their average entry price (sounds like the sort of thing even SailorRob might do?)? The 'poxy dividends' you refer to have summed to $3.58 per share since that 31/03/2008 reference date. If that is what you refer to as a 'pox', then I can reveal that I have been quite happy to be signed up to such a 'maxi-pox' over that time-frame. In fact if I can put off seeing the (financial) doctor (i.e. not sell my shares), there is every chance this Spark 'dividend pox' on me will continue!

As for inflation doing a number on my dividends, I may have even spent some of them on holidays over that time (!!!). Even if that was not permissible under SailorRob rules.



Yes margins have improved and no it's not an awful business but it's FAR too expensive.

Correct me if I wrong but [b]the share price is the same as 1993.


According to my records the Spark (or Telecom as it was then) share price on 30th September 1993 was $3.96. So yes not much share price gain for our 'lay on the couch for thirty one years' investor (although now many investors are really horizontal for 31 years?). But the dividend feed over that time has amounted to $8.22 per share. That has bought our 'couch surfing investor' quite a helping of popcorn over the years. And of course you omitted the small fact that between when the share was listed in 1991 and 30th September 1993 the Spark/Telecom share price doubled.



What the Sailor will admit he does not know, is why the hell anyone would own this?

Who in their right mind would choose this over Berkshire?


What was that dividend yield on Berkshire again?

SNOOPY

[SailorRob]

16.5 years ago was 2008. On 31st March 2008 the Spark/Telecom share price was $3.74. So not a great capital return but not zero - it is closer to 40cps. Following that time, there was a period where the share price dipped right down into the low $2 range. Some far thinking investors may have bought a few more Spark back in those dark days to lower their average entry price (sounds like the sort of thing even SailorRob might do?)? The 'poxy dividends' you refer to have summed to $3.58 per share since that 31/03/2008 reference date. If that is what you refer to as a 'pox', then I can reveal that I have been quite happy to be signed up to such a 'maxi-pox' over that time-frame. In fact if I can put off seeing the (financial) doctor (i.e. not sell my shares), there is every chance this Spark 'dividend pox' on me will continue!

As for inflation doing a number on my dividends, I may have even spent some of them on holidays over that time (!!!). Even if that was not permissible under SailorRob rules.



According to my records the Spark (or Telecom as it was then) share price on 30th September 1993 was $3.96. So yes not much share price gain for our 'lay on the couch for thirty one years' investor (although now many investors are really horizontal for 31 years?). But the dividend feed over that time has amounted to $8.22 per share. That has bought our 'couch surfing investor' quite a helping of popcorn over the years. And of course you omitted the small fact that between when the share was listed in 1991 and 30th September 1993 the Spark/Telecom share price doubled.



What was that dividend yield on Berkshire again?

SNOOPY

You're happy with a total return of 4.29% CAGR over 16.5 years?

Damn.

Berkshire dividend is massive, will calculate later if I get a chance, would be extremely difficult to explain to you...

To save me the time, can you tell us the CAGR over that 31 years with dividends, less than 4% I guess.

So in real terms you've lost capital.

Unless you believe the CPI in which case you might have had a 1% CAGR.

Not enough for me snoop.

[SailorRob]

Another thing I don't understand, perhaps 'the locals' can help me, is how can a company destroy 31 years of retained earnings.

These retained earnings must amount to hundreds of millions of dollars, and after 31 years they have turned into precisely zero market value.

Now that's impressive.

Forget the dividends, that's the obvious part. What you need to LAZER focus on is the retained earnings and what happens to each and every cent.

[Snoopy]

Another thing I don't understand, perhaps 'the locals' can help me, is how can a company destroy 31 years of retained earnings.

These retained earnings must amount to hundreds of millions of dollars, and after 31 years they have turned into precisely zero market value.


You are showing your newbie status on the Spark scene with this question SailorRob. Retained earnings at Spark eh? Further back in this thread you will find your answer, which I requote below



This is a comparison between 3 methods of measuring net profit after tax. The first one, most quoted in the glossy Spark presentations is 'Net Profit After Tax'. This is recorded in this table below under the monicker 'Net earnings'. This is how the 'often highlighted in presentations' NPAT is described in Spark's 'Statement of Profit and Loss and Other Comprehensive Income'.

Nevertheless in any year, there are often transactions or expenses that are 'one offs', that take away from the general picture of how the core of the business is doing. As an investor, I look for repeatable results. So I like to look through these 'one offs', so that I can get a better understanding of long term earnings trends. To enable me to do this, I calculate something I call 'normalised earnings', which is the second NPAT measure that I have tabulated.

The third NPAT measure is called 'Total Comprehensive Income' (TCI). This income measure takes 'Net Earnings' but further incorporates changes in values of hedge contracts based around currency swaps and interest rates swaps. Spark is partly financed by overseas capital, which is borrowed at overseas interest rates over period(s) of several years. Hedging contracts can provide certainty of NZ dollar denominated interest payments while these loans are outstanding, and certainty on the NZ dollar capital repayment that will ultimately be required to pay back loan capital at the end of each overseas loan term. Nonetheless, 'annual reporting' is required to reflect fair market values of these contracts should they be suddenly and prematurely cancelled. These annual adjustments are required to be incorporated in annual profit figures by NZ accounting standards, despite there being no plans by Spark to terminate these arrangements early. Typically these annual adjustments are volatile in size and may be positive or negative. This is why TCI is a more volatile measure of net profit than the other two methods I have described. To further add to the volatility, equity investments in companies initiated by Spark management, - as measured by a change in market value of such investments over a year - , are also incorporated into the TCI profit calculation.







Year
Normalised NPAT
Total Comprehensive Income (TCI)
Shares EOFY
Normalised eps
Net Earnings ps
TCI ps
dps (tax paid)
EOFY NTA


FY2018:
($365m - 0.72($10m) ) = $358m
$357m
1835m
19.5cps
19.9cps
19.5cps
24.0cps
84.0cps


FY2019:
($409m - 0.72($15m) ) = $398m
$437m
1836m
21.7cps
22.3cps
23.8cps
23.3cps
79.8cps


FY2020:
($427m - 0.72($35m-$2m) - $10m -$7m) = $386m
$483m
1837m
21.0cps
23.2cps
26.3cps
23.3cps
81.3cps


FY2021:
($384m - 0.72($28m - $16m) ) = $375m
l$354m
1867m
20.1cps
20.6cps
19.0cps
25.0cps
80.5cpsone


FY2022:
($410m - 0.72($26m) ) = $397m
$427m
1872m
20.9cps
21.2cps
22.8cps
25.0cps
78.8cps





Total



103.2cps
107.2cps
113.4cps
120.6cps




Notes

1/ Normalised earnings = Net Earnings (+/-) One off Adjustments. Normalisation details are in post 1994.
2/ eps = (Normalised Earnings) / (Total Shares on Issue, EOFY)
3/ Dividend payments recorded are those paid during the financial year in question (not dividends declared in that financial year).
4/ Gross dividend payments I have calculated in post 1968. After tax dividend figures are the respective gross numbers multiplied by 0.72.


Chair Justine Smyth is the new 'Mother Hubbard'. You now know what is in her (and Spark's) 'retained earnings' cupboard.

SNOOPY

[SailorRob]

You are showing your newbie status on the Spark scene with this question SailorRob. Retained earnings at Spark eh? Further back in this thread you will find your answer, which I requote below





Chair Justine Smyth is the new 'Mother Hubbard'. You now know what is in her (and Spark's) 'retained earnings' cupboard.

SNOOPY


Thanks Snoopy, I didn't have time or inclination to go through in detail, but are you saying they pay out 100% of normalised earnings give or take?

[Snoopy]

Thanks Snoopy, I didn't have time or inclination to go through in detail, but are you saying they pay out 100% of normalised earnings give or take?


I hope you have the time and inclination to take in this answer: "Yep"

SNOOPY

[RupertBear]

I hope you have the time and inclination to take in this answer: "Yep"

SNOOPY

:lol::lol::lol:

[SailorRob]

I hope you have the time and inclination to take in this answer: "Yep"

SNOOPY


Thanks,

Well that explains everything. What an absolute disaster no wonder it has underperformed cash for 31 years.

How the hell do they expect to grow without retaining any earnings?

I see total assets has ballooned over the last decade while revenue has remained flat, yes the margins have improved a little but hell they have a LOT more assets at work.

Where did the funding come from for this huge asset build if they paid out all earnings?

Oh right, liabilities have increased 50%


Snoopy you should focus you attention on good businesses and out of NZ, a term deposit has given Spark a good run over multiple decade long periods.

[Baa_Baa]

Snoopy you should focus you attention on good businesses and out of NZ, a term deposit has given Spark a good run over multiple decade long periods.

SR, recall that term deposit rates returns have been terrible for many years until recently, and a share like Spark has been a reliable income for investors throughout that time, even now albeit not as attractive vs term deposits as it was for a long time.

I reckon it's as simple as that. NZX mum and dad investors seem to be biased towards regular reliable income, and in that regard SPK has delivered. I bet they don't give a second thought, or even know, how that dividend is created, just that it comes to them, reliably every six months.

There's a few other companies that our income focused NZX investors concentrate on, for the same reasons. Reliable sustained income, regardless of how that is achieved.

[SailorRob]

SR, recall that term deposit rates returns have been terrible for many years until recently, and a share like Spark has been a reliable income for investors throughout that time, even now albeit not as attractive vs term deposits as it was for a long time.

I reckon it's as simple as that. NZX mum and dad investors seem to be biased towards regular reliable income, and in that regard SPK has delivered. I bet they don't give a second thought, or even know, how that dividend is created, just that it comes to them, reliably every six months.

There's a few other companies that our income focused NZX investors concentrate on, for the same reasons. Reliable sustained income, regardless of how that is achieved.


Yes for sure, but from 1993 perhaps rolling 3/5 year term deposits have done somewhere in the 4's.

What is reliable sustained income worth when you lose a decade of dividends in share price decline that doesn't come back.

I understand what you are saying but nobody can argue that this is a good business or has produced good returns over time.

Surely to god the answer for these folk is corporate bonds.

[Snoopy]

You're happy with a total return of 4.29% CAGR over 16.5 years?

Damn.


$3.74(1+r)^16.5 = ($4.23+$3.58)
=> (1+r)^16.5 = 2.088
=> (1+r) = 1.0456
=> r = 4.56% compounding

So the return is a little better than you calculated SailorRob. But you also have to remember that this return is 'after tax'. So the equivalent gross return based on a 28% company tax rate is: 4.56%/0.72 = 6.33%

That might not sound so spectacular in today's market. But according to my 'indicative interest rate record', bank interest rates for term deposits were about 4.5% over that period, before dropping to the Covid lows of nearly nothing and rising to circa 6% today. So I think over that 16.5 years you would have ended up earning about 2 percentage points above the equivalent money in bank term deposits. That would make you nearly 50% better off in cash received terms. An regular income incremental amount definitely worth having.



To save me the time, can you tell us the CAGR over that 31 years with dividends, less than 4% I guess.


Of course. I don't have a boat to scrub barnacles off, so obviously I have heaps of time for an exercise such as this ;-P

$3.96(1+r)^31 = ($4.23+$8.22)
=> (1+r)^31 = 3.144
=> (1+r) = 1.0376
=> r = 3.76% compounding

So your 'less than 4%' was a good guess. The equivalent gross return was 3.76%/0.72 = 5.22%. That is probably closer to what you might get if you were invested in term deposits over all that time. But IIRC my own main reason for beginning to bump up in size my own modest size Telecom holding 'late last'/'early this' century was because I thought I was going to make my fortune in the dot.com boom. Just buy into anything connected with the internet and you would strike pay dirt was my thought. As it happened I didn't make my fortune by investing in Telecom. But I didn't lose my shirt either. All told, considering my recklessness in those earlier days, to come out of it all with a perpetual 5.22% gross return at the end of it all was probably a reasonable result.

SNOOPY

[winner69]

Major von Tempsky was keen on Telecom / Spark

What happened to the Major

[Snoopy]

Well that explains everything. What an absolute disaster no wonder it has underperformed cash for 31 years.


Not true. Spark has not underperformed cash over 31 years




Snoopy you should focus you attention on good businesses and out of NZ, a term deposit has given Spark a good run over multiple decade long periods.


I think you are starting to get where the real measuring stick for Spark shares should be set.



Yes for sure, but from 1993 perhaps rolling 3/5 year term deposits have done somewhere in the 4's.

What is reliable sustained income worth when you lose a decade of dividends in share price decline that doesn't come back.


The share price has been up and down but there has been no massive permanent decline as you suggest. Unless you deliberately pick a peak and a trough to make your (false) point.



I understand what you are saying but nobody can argue that this is a good business or has produced good returns over time.
Surely to god the answer for these folk is corporate bonds.


Not every investor wants all of their portfolio 'operating to the max' to get outstanding growth. Sometimes having part of your portfolio that produces a steady income return is more the ticket. I guess 'corporate bonds' could provide such a solution. But not being a bond investor myself, I think of my Spark shares as a kind of defacto bond.

Of course, Spark have their own bonds. The SPF570 bond last traded on the market at 5.17%.

OTOH the 'Spark shares bond' last traded on an historical gross dividend yield of (27/0.72) / 423 = 8.87%

So SPF570 at 5.17% or SPK at 8.87%? Hmmm, I seem to be having some difficulty in making up my mind here. Which 'bond' should I choose SailorRob?

SNOOPY

[Mrbuyit]

My spk shares have put a lot more in my back pocket than oca in a similar timeframe.. first purchased June 2018 for 3.71, I see they are down a dollar or so in the last few months but I don't really follow the sp .. I suspect other spk holders also don't really follow the price too closely?

Will the next 6 years be a different story.. well perhaps.

[SailorRob]

Not true. Spark has not underperformed cash over 31 years




I think you are starting to get where the real measuring stick for Spark shares should be set.



The share price has been up and down but there has been no massive permanent decline as you suggest. Unless you deliberately pick a peak and a trough to make your (false) point.



Not every investor wants all of their portfolio 'operating to the max' to get outstanding growth. Sometimes having part of your portfolio that produces a steady income return is more the ticket. I guess 'corporate bonds' could provide such a solution. But not being a bond investor myself, I think of my Spark shares as a kind of defacto bond.

Of course, Spark have their own bonds. The SPF570 bond last traded on the market at 5.17%.

OTOH the 'Spark shares bond' last traded on an historical gross dividend yield of (27/0.72) / 423 = 8.87%

So SPF570 at 5.17% or SPK at 8.87%? Hmmm, I seem to be having some difficulty in making up my mind here. Which 'bond' should I choose SailorRob?

SNOOPY

What's the duration of the bond?

For me I wouldn't touch Spark equity no matter the yield, so I'd pick the bond every time and over 15 years I would not be comfortable holding the bonds either, I'd take big Grants 10 year over spark, no brainier.

[ValueNZ]

=
So SPF570 at 5.17% or SPK at 8.87%? Hmmm, I seem to be having some difficulty in making up my mind here.

That's a false dichotomy. Your options to allocate capital extend far beyond Spark lol.

[Snoopy]

What's the duration of the bond?


spf570 has 2.5 years until maturity. Trading at 5.1% today



For me I wouldn't touch Spark equity no matter the yield, so I'd pick the bond every time and over 15 years I would not be comfortable holding the bonds either, I'd take big Grants 10 year over spark, no brainier.


NZ ten year government bonds are trading at 4.6% today. As an investment prospect, that is too low for me. Although I do admit to having term deposits with capital 'waiting to be deployed' at interest rates lower than that.

Spark shares are trading on an historic gross yield of 8.9%, based on historical annual dividend payments of 27cps, or a gross figure of 27cps/0.72 = 37.5cps. I don't use that figure myself when evaluating income investments. I am much more interested in the five year gross historical average which comes out at 35.07cps
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1047369&viewfull=1#post1047369

With a share price of $4.23, that gives me a five year average gross yield of 35.07c/$4.23= 8.3%

What ever way you look at it, I am getting a a near 4 percentage point gain in cashflow (something like 80%) over opting to give my money to big Grant. I am happy to exchange a little Spark share price volatility for that. As far as I am concerned 'Big Grant' can take a jump with his miserly offer (which of course he did, all the way down to Otago University).

SNOOPY

[Snoopy]

That's a false dichotomy. Your options to allocate capital extend far beyond Spark.


Of course. I am not suggesting people throw all their money into Spark shares or anything like that. All shares have risks and I have previously outlined in this thread what I think they are for Spark going forwards. I am hoping things don't go wrong. But I try to pick my shares so that if things do go wrong, all of my shares will not be equally affected at the same time. IOW the portfolio has some built in robustness to the unexpected. Just before my latest share purchase, Spark shares made up a fraction over 10% of my NZX portfolio, which is made up of twelve different shares. Ideally my target is to have SPK weighted a couple of percentage points more than that, because the portfolio weighting of my two other 'bond' utility type shares, CEN and MCY, are higher than that 10% figure. I judge myself underweight in Spark, so I am adding a few. That is all that is happening here, from my perspective.

SNOOPY

[SailorRob]

spf570 has 2.5 years until maturity. Trading at 5.1% today



NZ ten year government bonds are trading at 4.6% today. As an investment prospect, that is too low for me. Although I do admit to having term deposits with capital 'waiting to be deployed' at interest rates lower than that.

Spark shares are trading on an historic gross yield of 8.9%, based on historical annual dividend payments of 27cps, or a gross figure of 27cps/0.72 = 37.5cps. I don't use that figure myself when evaluating income investments. I am much more interested in the five year gross historical average which comes out at 35.07cps
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1047369&viewfull=1#post1047369

With a share price of $4.23, that gives me a five year average gross yield of 35.07c/$4.23= 8.3%

What ever way you look at it, I am getting a a near 4 percentage point gain in cashflow (something like 80%) over opting to give my money to big Grant. I am happy to exchange a little Spark share price volatility for that. As far as I am concerned 'Big Grant' can take a jump with his miserly offer (which of course he did, all the way down to Otago University).

SNOOPY


Yes but as you know it's not the historical dividend that matters.

This company has had a real decline in revenues of 23% in 10 years and that is with an exploding population.

It had made up for that with expanding margins, you are well aware that margins cannot expand forever and particularly not in this hyper competitive industry, much more likely to see margin compression.

Given that all earnings have been paid out, the near 50% increase in assets at work has been paid for with a large increase in debt. This will be pressing on margins as well in the normal interest rate world.

So given you focus so much on the past, how in the hell are they going to start growing revenue in real terms now?

If they can't grow revenue in real terms, and as we have discussed they cant keep expanding margins, cant keep loading up on debt... How the hell is your dividend going to increase or even be maintained?

So with a declining dividend (particularly in real terms) your capital value will also decline far more rapidly and you will be in a situation where you never get your money back now matter how long you wait.

This is why you pick the bonds as you have a good chance of getting that return, or if you dont, you'll own the equity (if there is any left).

Now we haven't even touched on CAPITAL requirements yet... I see they are spending way more than depreciation... How are you sure you're getting a return on that investment and what will it be?

[Snoopy]

Yes but as you know it's not the historical dividend that matters.


You are right, future dividends are what matters. But I still find the recent past is the best predictor of the near future. And the one thing you know about historical figures is that the organisation structure does have the capability to achieve them, because they have done so before....



This company has had a real decline in revenues of 23% in 10 years and that is with an exploding population.


I presume when you are talking about a 'real decline' you are bringing inflation into the equation? I don't buy that argument with tech companies. Tech always gets better and cheaper to do the same stuff. So the driver of revenue must be in the form of 'new applications'. Even using the term 'revenue' is a misnomer, because, as you saw in post 2171, 'revenue' in 2013 does not have the same meaning as 'revenue' in 2023.
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1052189&viewfull=1#post1052189

If you take out the revenue from the Australian operation from FY2013 that was sold off, 'revenue' did actually grow over the ten years. The other thing that has cramped 'revenue' is the constant and unrelenting decline of the old PSTN copper landline technology. The decline in that has been masking the growth in revenue in other areas. The point must come, sooner rather than later I feel, that this decline in the legacy network slows and what remains is the residual: possibly the rural copper network where it is uneconomic to roll out fibre. At that point the real growth in new areas will show through as positive growth in its own right, not new technology just netting off against the decline of the old.




It had made up for that with expanding margins, you are well aware that margins cannot expand forever and particularly not in this hyper competitive industry, much more likely to see margin compression.


Not sure where you get this 'expanding margins' thing from. I am not seeing it. I am certainly not predicating any future dividend growth on 'expanding margins'.
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1022605&viewfull=1#post1022605



Given that all earnings have been paid out, the near 50% increase in assets at work has been paid for with a large increase in debt. This will be pressing on margins as well in the normal interest rate world.


MDRT stood at 1.72 years immediately after the cell phone tower transaction was concluded.
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1048917&viewfull=1#post1048917

Since then it has blown out again, both from network investment, data centre investment and those share buybacks. But those share buybacks in particular are a capital optimisation tool. If Spark did not have 'excess capital' they would not have done them. So I don't think you can say current debt levels are an issue when Spark voluntarily put themselves in the balance sheet position they are in.



So given you focus so much on the past, how in the hell are they going to start growing revenue in real terms now?


5G mobile will open up new applications, as will the drive into more data centres. That's the plan anyway.



If they can't grow revenue in real terms, and as we have discussed they cant keep expanding margins, cant keep loading up on debt... How the hell is your dividend going to increase or even be maintained?


I don't accept the 'perpetual declining revenue' argument you are putting forward for reasons previously explained. Also, part of the way profit can expand unrelated to revenue is a continued laser focus on costs. As older network technology is retired, that will reduce costs. More AI on the help desk might be another example.



So with a declining dividend (particularly in real terms) your capital value will also decline far more rapidly and you will be in a situation where you never get your money back now matter how long you wait.


But the dividend is not declining is it? Quite the reverse, it has been raised this year - albeit very modestly. And this is the reason I use 'actual historical dividends' from the last five years to make my investment case. It means that if dividends did fall back towards those paid in earlier years, my investment case would still stack up. I am not relying on 'bullish forecasts from management' to cement my investment case.



This is why you pick the bonds as you have a good chance of getting that return, or if you don't, you'll own the equity (if there is any left).


I know this is the theory. But in practice can you name one company where shareholders have lost, but the bondholders come out scott free? Also being an equity holder gives me more access to 'upside risk' than being a bond holder.



Now we haven't even touched on CAPITAL requirements yet... I see they are spending way more than depreciation... How are you sure you're getting a return on that investment and what will it be?


The capital spent on 5G and data-centres is up front and has mostly happened. The main return from that spend has yet to come through.

SNOOPY

[SailorRob]

You are right, future dividends are what matters. But I still find the recent past is the best predictor of the near future. And the one thing you know about historical figures is that the organisation structure does have the capability to achieve them, because they have done so before...

Yes much the way I look at things as well, I like how you normalise things over a period of years - very important.


I presume when you are talking about a 'real decline' you are bringing inflation into the equation? I don't buy that argument with tech companies. Tech always gets better and cheaper to do the same stuff. So the driver of revenue must be in the form of 'new applications'. Even using the term 'revenue' is a misnomer, because, as you saw in post 2171, 'revenue' in 2013 does not have the same meaning as 'revenue' in 2023.
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1052189&viewfull=1#post1052189

If you take out the revenue from the Australian operation from FY2013 that was sold off, 'revenue' did actually grow over the ten years. The other thing that has cramped 'revenue' is the constant and unrelenting decline of the old PSTN copper landline technology. The decline in that has been masking the growth in revenue in other areas. The point must come, sooner rather than later I feel, that this decline in the legacy network slows and what remains is the residual: possibly the rural copper network where it is uneconomic to roll out fibre. At that point the real growth in new areas will show through as positive growth in its own right, not new technology just netting off against the decline of the old.


Yes correct about inflation, agreed with tech getting better and cheaper but revenue must be maintained in the face of this. Good points you raise that you as a local know and I as a tourist don't and a lesson that you need nuance if casually glancing at revenue numbers over a decade. I had assumed that margins must have expanded as you had said that the business had improved a lot when I raised flat revenues, now I understand what you mean.



Not sure where you get this 'expanding margins' thing from. I am not seeing it. I am certainly not predicating any future dividend growth on 'expanding margins'.
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1022605&viewfull=1#post1022605


MDRT stood at 1.72 years immediately after the cell phone tower transaction was concluded.
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1048917&viewfull=1#post1048917

Since then it has blown out again, both from network investment, data centre investment and those share buybacks. But those share buybacks in particular are a capital optimisation tool. If Spark did not have 'excess capital' they would not have done them. So I don't think you can say current debt levels are an issue when Spark voluntarily put themselves in the balance sheet position they are in.

Many companies have voluntarily put themselves in balance sheet positions that have become major issues. Wasn't so much that I think they are an issue, just an observation.


5G mobile will open up new applications, as will the drive into more data centres. That's the plan anyway.

Yes, will need to see what the returns are on all that CAPEX.


I don't accept the 'perpetual declining revenue' argument you are putting forward for reasons previously explained. Also, part of the way profit can expand unrelated to revenue is a continued laser focus on costs. As older network technology is retired, that will reduce costs. More AI on the help desk might be another example.

Yes you explained the revenue argument well. But if profit can expand unrelated to revenue - in other words expanding margins, but all the competitors have the same technology so usually the AI on the Helpdesk type advancement all goes to the customer and doesn't tend to stick with higher margins for the company.



But the dividend is not declining is it? Quite the reverse, it has been raised this year - albeit very modestly. And this is the reason I use 'actual historical dividends' from the last five years to make my investment case. It means that if dividends did fall back towards those paid in earlier years, my investment case would still stack up. I am not relying on 'bullish forecasts from management' to cement my investment case.

No it's not, perhaps you could argue in real terms that it is, but my comment related to the possibility of the future with the assumptions I had made with revenue, rapid technology change, CAPEX and debt.


I know this is the theory. But in practice can you name one company where shareholders have lost, but the bondholders come out scott free? Also being an equity holder gives me more access to 'upside risk' than being a bond holder.

Scott free, no I can't name one, there would be plenty that the senior bond holders were eventually made whole but I get the point.


The capital spent on 5G and data-centres is up front and has mostly happened. The main return from that spend has yet to come through.

Yes and then it's the next round of CAPEX after that for the new generation tech, god only knows what the world in this respect will look like in 10 years. The OPEX of the data centres must be significant.

SNOOPY


Great response Snoopy, good points all taken on board.

Overall I don't think the margin of safety is there and the future is too difficult to predict, the big money is figuring out what wont change.

You have done your work and know your $hit however. At a certain price I could be interested.

Wrightsons seems far more compelling an opportunity at present, what do you think of the two compared side by side right now?

[DarkHorse]

Hi Snoopy,
I'd be interested to know how you think Spark compares to Chorus as a bond proxy with a solid dividend.
Thanks!
DH

[Snoopy]

Hi Snoopy,
I'd be interested to know how you think Spark compares to Chorus as a bond proxy with a solid dividend.
Thanks!
DH


This is getting a bit old now but.......

https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=909170&viewfull=1#post909170

I have to say I do not favour government regulated utilities, and in particular Chorus where Spark has vowed to undermine the Chorus broadband base by promoting 'wireless broadband'. I also do not like the debt position at Chorus. I have never bought any Chorus. But I do own a small holding courtesy of the Telecom split. I should really tidy that holding up. But I am keeping it for now, just for the insight it can give me as a 'customer supplier' to my preferred telecommunications hold, - that being Spark.

SNOOPY

[mshierlaw]

Hi Snoopy,
I'd be interested to know how you think Spark compares to Chorus as a bond proxy with a solid dividend.
Thanks!
DH

I used to be a solid believer in dividend yields as a secure means of generating income. The last few years have shown numerous dividend traps generated in this market. I think bond proxy is now a thing of the past. Buyer beware :scared:

[Snoopy]

I used to be a solid believer in dividend yields as a secure means of generating income. The last few years have shown numerous dividend traps generated in this market. I think bond proxy is now a thing of the past. Buyer beware :scared:


I was about to write a snarky reply. Something along the lines of:
"This is Spark mate. With a thirty year record of paying dividends. And everybody needs a phone."

That was until I remembered the gamesmanship that preceded the Chorus split, and the absolute shock on the face of then CEO TG as she realised the government had called her bluff and that her self admitted tactics of using confusion as a dollar maximizing marketing tool were coming to an end. IIRC at the time the then Telecom share price took a hiding from which it took years to recover. So good call 'mshierlaw'. Even the 'safest' shares can take a hit.

I guess the question is "can you stand the volatility" (not that bonds don't suffer from volatility as well of course). In my case the extra two percentage points of income (or more in this instance) is well worth the extra vacillations of share prices. But, of course, others may come to a different decision. The way to guard against 'bond proxy' (share) volatility IMV is to make sure you have a portfolio of bond proxies that are not well correlated in their respective market positions. That way if the black swan event happens, only one of your 'team' goes down.

SNOOPY

[percy]

https://www.rnz.co.nz/news/business/517357/genesis-energy-and-spark-partner-up-on-renewable-energy

[Snoopy]

Overall I don't think the margin of safety is there and the future is too difficult to predict, the big money is figuring out what wont change.


With something in the tech space, you have to have the right 'sailors' in place to navigate the stormy seas. If you want to see if Spark have the right people, there is no better thing to do than look at this analyst presentation given in FY2023. The important bit you need to watch is the analyst question time which starts at 1hr 38minutes into the presentation.

https://edge.media-server.com/mmc/p/mnjnxvwk

Most presentations of this sort are by the CEO accompanied by the CFO. But in this one CEO Jolie Hodson has (count 'em) eight of her trusted lieutenants on hand. That's right - eight. I don't think I have ever seen a company presentation with that many presenters on stage before. Then watch and see how Jolie Hodson handles it all.....

The thing that impressed me was that Hodson had the ability to break down broad questions into different sub-parts 'on the fly', and then have no trouble handing some of the sub questions straight over to the appropriate senior team member. Putting 'the team' on stage like that suggests that Jolie Hodson has supreme confidence in all of them. And while continuing to hold an overall watching CEOs brief, I get the feeling she would be quite happy for them to get on with their everyday jobs without checking up on them too often. This IMO is the kind of culture you want in a big company like Spark. I expect the respect is reciprocated by the lieutenants, and they are happy to go the extra mile for their CEO.

Although it is often the CEO that gets the limelight, the real skill of a CEO is to build a senior team around you with just the right skills to drive the business forward. I believe that with the team of eight on stage, Jolie Hodson has shown that she has done just that. And that in turn should give investors in Spark confidence that the good ship Spark does indeed have the capability to navigate those stormy telecommunication investment seas.

SNOOPY

[SailorRob]

With something in the tech space, you have to have the right 'sailors' in place to navigate the stormy seas. If you want to see if Spark have the right people, there is no better thing to do than look at this analyst presentation given in FY2023. The important bit you need to watch is the analyst question time which starts at 1hr 38minutes into the presentation.

https://edge.media-server.com/mmc/p/mnjnxvwk

Most presentations of this sort are by the CEO accompanied by the CFO. But in this one CEO Jolie Hodson has (count 'em) eight of her trusted lieutenants on hand. That's right - eight. I don't think I have ever seen a company presentation with that many presenters on stage before. Then watch and see how Jolie Hodson handles it all.....

The thing that impressed me was that Hodson had the ability to break down broad questions into different sub-parts 'on the fly', and then have no trouble handing some of the sub questions straight over to the appropriate senior team member. Putting 'the team' on stage like that suggests that Jolie Hodson has supreme confidence in all of them. And while continuing to hold an overall watching CEOs brief, I get the feeling she would be she is also quite happy for them to get on with their everyday jobs without checking up on them too often. This IMO is the kind of culture you want in a big company like Spark. No doubt the respect is reciprocated by the lieutenants and they are happy to go the extra mile for their CEO.

Although it is often the CEO that gets the limelight, the real skill of a CEO is to build a senior team around you with just the right skills to drive the business forward. I believe that with the team of eight on stage, Jolie Hodson has shown that she has done just that. And that in turn should give investors in Spark confidence that the good ship Spark does indeed have the capability to navigate those stormy investment seas.

SNOOPY


That is all wonderful and heartwarming.

However.

The greatest buggy whip company in the world did not fare well upon the arrival of the horseless carriage.

When a phenomenal management team combine with an average to poor business, it is always the reputation of the business that wins out.

We have no clue what the world of telecommunications looks like in 10 years or who will be playing the game.

Vaseline however will still sell in preference to petroleum jelly.

[kiora]

If I was an investor this would worry me or is it already baked into recent share price decline?

"MARKET RELEASE – MONDAY 6 MAY 2024
EMBARGOED UNTIL [DATE] [delete this row if not required]
Spark reduces FY24 EBITDAI guidance as tough trading conditions intensify
Spark New Zealand (Spark) today announced it is reducing FY24 EBITDAI guidance from
$1,215-$1,260 million to $1,170-$1,210 million, as challenging trading conditions intensified in some
parts of the business. There is no change to FY24 capital expenditure and dividend guidance."
https://stocknessmonster.com/announcements/spk.nzx-430555/
https://stocknessmonster.com/charts/spk.nzx/

Compared to One NZ

"EBITDAF for the year was $600.1 million, up 13.7% from $527.8 million in the prior
year. This was a pleasing result against guidance of $580 million to $620 million.
FY2024 growth was driven through strong performance in Consumer Mobile and
Wholesale alongside prudent cost management"

15111

[Snoopy]

If I was an investor this would worry me or is it already baked into recent share price decline?

"MARKET RELEASE – MONDAY 6 MAY 2024
EMBARGOED UNTIL [DATE] [delete this row if not required]
Spark reduces FY24 EBITDAI guidance as tough trading conditions intensify
Spark New Zealand (Spark) today announced it is reducing FY24 EBITDAI guidance from
$1,215-$1,260 million to $1,170-$1,210 million, as challenging trading conditions intensified in some
parts of the business. There is no change to FY24 capital expenditure and dividend guidance."
https://stocknessmonster.com/announcements/spk.nzx-430555/
https://stocknessmonster.com/charts/spk.nzx/

Compared to One NZ

"EBITDAF for the year was $600.1 million, up 13.7% from $527.8 million in the prior
year. This was a pleasing result against guidance of $580 million to $620 million.
FY2024 growth was driven through strong performance in Consumer Mobile and
Wholesale alongside prudent cost management"

15111


Kiora, the profit downgrade from Spark (in which the dividend was not downgraded) was largely from the cancellation, I would say postponement, of government department (and business) system upgrades under their IT umbrella. From your reference OneNZ is suffering from exactly the same thing.

"it provides fixed-line and ICT services to more than 110,000 corporate, government, and small-to-medium businesses."
"The Enterprise side of the business has been challenging with downward pressure on connections and revenue, as both public and private sector Enterprise customers downsize and look for cost savings in the current economic environment."

But this IT side of the OneNZ business is proportionately much smaller than Spark. OneNZ remains largely a mobile driven business.

The reporting dates for Spark and OneNZ seem nine months out of phase. OneNZ turned in a creditable result with mobile revenues up 6%. But Spark went one better with mobile revenues up 9% for their period.

I expect both OneNZ and Spark to keep doing well. But overall I expect Spark to do better as they offer a more complete service.

SNOOPY

[Snoopy]

That is all wonderful and heartwarming.

However.

The greatest buggy whip company in the world did not fare well upon the arrival of the horseless carriage.

When a phenomenal management team combine with an average to poor business, it is always the reputation of the business that wins out.

We have no clue what the world of telecommunications looks like in 10 years or who will be playing the game.

Vaseline however will still sell in preference to petroleum jelly.

Sailor, I know you are disciple of Buffett. And Buffett and tech tend not to go together (even if somehow Buffett managed to get into Apple). As Buffett would say, there is no need to swing at every pitch. So if you don't want to invest in Spark that is fine.

However just because you/Buffett cannot see where tech will be in ten years time, that does not mean that those in the industry can't. Even so, I expect there will be mis-steps from time to time. But as long as those are identified and minimised that is all I could ask for with Spark. As for calling Spark an 'average to poor business'? I did run the Buffett tests over it. (Spoiler alert: it failed).

https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1022531&viewfull=1#post1022531

Nevertheless I would not call it a 'average to poor business'. Spark has good ROE and margins, even if they are not increasing right now. As far as telecommunications businesses go, it is the best I have analysed. In fact, I believe Spark to be 'world class', even though the industry works against that class being filled with 'A' students.

Carry on in your horse and cart, (and I do mean that in a tech averse respectful way).

SNOOPY

[SailorRob]

Sailor, I know you are disciple of Buffett. And Buffett and tech tend not to go together (even if somehow Buffett managed to get into Apple). As Buffett would say, there is no need to swing at every pitch. So if you don't want to invest in Spark that is fine.

However just because you/Buffett cannot see where tech will be in ten years time, that does not mean that those in the industry can't. Even so, I expect there will be mis-steps from time to time. But as long as those are identified and minimised that is all I could ask for with Spark. As for calling Spark an 'average to poor business'? I did run the Buffett tests over it. (Spoiler alert: it failed).

https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1022531&viewfull=1#post1022531

Nevertheless I would not call it a 'average to poor business'. Spark has good ROE and margins, even if they are not increasing right now. As far as telecommunications businesses go, it is the best I have analysed. In fact, I believe Spark to be 'world class', even though the industry works against that class being filled with 'A' students.

Carry on in your horse and cart, (and I do mean that in a tech averse respectful way).

SNOOPY


Margins have nothing to do with a business being average, poor or exceptional. Some of the very best in the world have incredibly slim margins, think COSTCO.

I should have said an average to poor (to awful) investment. Looking at the ROE's and returns on capital over time from a data provider, Spark does look like it performs (very) well. To actually analyse it properly would take me a long time, but if the figures I am seeing are correct then they are pretty good.

However.

If indeed Spark can consistently return low 20's on equity and you are paying 5 times that equity value AND they cannot reinvest much equity at those returns, then your results are going to be god awful. If you can buy that equity for 100c on the $ then you will have made an exceptional investment.

Those in the industry are notoriously terrible for seeing where anything will be in 10 years time, and lets just think for a minute... If indeed Buffett was hopeless at it and others were good... Berkshire would just hire them. Like Ajit the best underwriter in the world who is far better than Buffett... Buffett hired him due to his skill.

The industry experts said that digital photography was a fad.

That txt messaging was a fad and would not be popular.

Steve Balmer worth over 100 billion dollars and the CEO of Microsoft at the time nearly wet himself laughing at the iPhone https://www.youtube.com/watch?v=nXq9NTjEdTo

Nobody has ever had a track record of seeing the future of telecommunications 10 years out, it's impossible.

If you can even tell me roughly whats going to happen with wireless vs copper vs fibre internet over the next decade I can make you 100 million dollars no problem at all.

[Snoopy]

Margins have nothing to do with a business being average, poor or exceptional. Some of the very best in the world have incredibly slim margins, think COSTCO.


I am using the word margin in the sense of 'net profit'/'revenue'. There are two strategies for raising net profit margin. One is to put a high mark up on what you are selling. The second is to operate on a much lower mark up but with greater stock turn. A simple example would be selling a single used car at a net $10,000 mark up verses selling ten used cars at a net $1,000 mark up each. From an accounting profit perspective there is no difference. Thus the likes of CostCo can make very good money with low mark ups on their goods providing their turnover keeps up.

Telecommunications companies are a little different in that, Spark retail shops aside, they tend to be selling a service rather than a product. But when I say they make a good margin, that statement encapsulates the total return on the funds invested and is not necessarily a statement on dollars earned as a result of any particular transaction or transactions.



Overall I don't think the margin of safety is there and the future is too difficult to predict, the big money is figuring out what wont change.

You have done your work and know your $hit however. At a certain price I could be interested.




I should have said an average to poor (to awful) investment. Looking at the ROE's and returns on capital over time from a data provider, Spark does look like it performs (very) well. To actually analyse it properly would take me a long time, but if the figures I am seeing are correct then they are pretty good.

However.

If indeed Spark can consistently return low 20's on equity and you are paying 5 times that equity value AND they cannot reinvest much equity at those returns, then your results are going to be god awful. If you can buy that equity for 100c on the $ then you will have made an exceptional investment.


Buy a share at $1. Get a consistent return of 20c per share as a dividend consistently. I agree that would be a dream. But I would suggest you 'dream on' if you think that, or the equivalent, is going to happen at Spark. There are people around who are prepared to pay a higher price than that 'dollar share face value' to get a 'not quite as high' and consistent return. One of those people is a bloke called 'Mr Market'. Based on the market price of SPK today, which means a gross yield of about 8.5%,, that Mr Market is prepared to pay 20/8.5 x $1 = $2.35 for the same share you claim is only worth $1 to you. So good luck with your market offer price of $1, and your denial that Mr Market exists.

The other point you miss is that although Spark is not able to reinvest the profits they generate at the high rate of return on equity they generate from their operations, that does not mean that you as the dividend recipient cannot. Once the Spark dividend is in your bank account you can do with it what you will. If you have identified a high return investment waiting in the wings like, -gulp- OCA, you could simply feed your Spark dividend into that every six months as part of a dollar cost averaging strategy if you wanted to do so.



Those in the industry are notoriously terrible for seeing where anything will be in 10 years time, and lets just think for a minute... If indeed Buffett was hopeless at it and others were good... Berkshire would just hire them. Like Ajit the best underwriter in the world who is far better than Buffett... Buffett hired him due to his skill.

The industry experts said that digital photography was a fad.

That txt messaging was a fad and would not be popular.

Steve Bulmer worth over 100 billion dollars and the CEO of Microsoft at the time nearly wet himself laughing at the iPhone https://www.youtube.com/watch?v=nXq9NTjEdTo

Nobody has ever had a track record of seeing the future of telecommunications 10 years out, it's impossible.

If you can even tell me roughly whats going to happen with wireless vs copper vs fibre internet over the next decade I can make you 100 million dollars no problem at all.


I get that everyone has a margin of safety they are prepared to tolerate. But Spark is not about guessing what tech is going to be most relevant going forwards. It is about providing the platform over which the really smart others can roll out their own tech. Spark are really 'piggy backers' rather than 'tech geniuses' in their own right. No-one is going to get super rich buying Spark shares. I accept that. But I would also guarantee that you will get a much steadier supply of dividends from Spark than a tech start up. Spark is just at a different point on the risk/reward curve compared to the kind of investment you, Sailor, would normally seek. Yet Spark share investors do get a flutter as well thrown in for free. That will pay off if start up within Spark 'MTTR' can snare a respectable share of the emerging global digital ID market, reputed to be worth $28billion.

SNOOPY

[Snoopy]

PGG Wrightsons seems far more compelling an opportunity at present, what do you think of the two compared side by side right now?


Now that is an interesting question, and very real for me because these two are right in front of me at the investment smorgasbord, currently being laid out at the NZX diner. I think the words 'right now' are a key phrase in your question, because 'right now' the market is rewarding cash, not the possibility of a whole lot more cash on a multi year deal down the track. That means the answer to your question is, if I have to choose, Spark. However, it is a fake question in that sitting in front of the investment smorgasbord, I don't have to choose. I can legitimately have a helping of both on my plate, and this is what I choose to do.

PGG Wrightson has for the last few years been my 'dividend champion', offering a significantly better yield than any of my other share investments. Now that yield has apparently dropped to zero. From a PGW share price high of over $5, riding the farming boom, down to $1.62 today, let's just say I have had plenty of opportunity to improve by skiing on that figurative ski slope. But unless I find that 'hindsight investment fund' that everyone on here keeps going on about, I can't capitalise on that now.

The question is looking forward through the next investment cycle, which will likely give me a better return: PGW or SPK? The answer to that question is PGW - no debate. I can see the price of PGW shares doubling in the next 2-3 years, should farm returns go back to even average earning levels. The only problem is, I cannot tell you exactly when that will happen. The further unknown is how patient the banks will be with our farmers (and farm suppliers) in the transition from trough to peak. I am not missing out on any divvies in the meantime. So my thoughts are that I will wait for the full year result announcement from PGW, probably at the end of August, and see what the banks make of PGWs progress. I am likely to 'miss the bottom' by doing that. But I will also de-risk my investment. It is certainly my intention to buy more PGW, but at a slightly different point on the risk return curve.

In the meantime, there are other tasty dishes ripe for sampling at the NZX smorgasbord investment diner.

SNOOPY

[see weed]

Check out the depth on SPK ASX. 5 identical sell orders of 1,988 shares in each sell order. To me it looks like one seller and not 5 sellers. What's that all about, someone averaging their sell orders?

[bull....]

been trying some bounce trades on this goes up morning , smashed in the arvo. new lows again

[Snoopy]

been trying some bounce trades on this goes up morning , smashed in the arvo. new lows again


Thanks for reminding me there is a recession on. I guess I will have to stop using my phone now :(

SNOOPY

[bull....]

Thanks for reminding me there is a recession on. I guess I will have to stop using my phone now :(

SNOOPY

why everyone needs a phone it doesnt stop people downgrading ph plans to cheaper ones. also holding off upgrading ph's or buying cheaper ones with no plans etc.

Is the div being maintained because of funds from tower sale ?

[Entrep]

Not sure where this bottoms

15126

[Snoopy]

Not sure where this bottoms

15126

Forget about that chart. You select the yield you want and you buy it. Whatever the chart does after that doesn't change the yield you bought.

SNOOPY

[Baa_Baa]

Forget about that chart. You select the yield you want and you buy it. Whatever the chart does after that doesn't change the yield you bought.

SNOOPY

True, but if you can read a market price chart and are prepared to time your investment (or top up), when the price reverts out of a downtrend, it's possible to exceed the yield that you want.

[Filthy]

maybe something close to covid lows of around ~$3.81; & might be interested around that level.

[Nor]

I tried to buy some around mid 3 some years ago, might we get there yet? And genesis, I thought 2.45 would be a good price but we've passed that and still going, could we get to 1.80? Was that the float price?

[Snoopy]

True, but if you can read a market price chart and are prepared to time your investment (or top up), when the price reverts out of a downtrend, it's possible to exceed the yield that you want.



maybe something close to covid lows of around ~$3.81; & might be interested around that level.

I think when investing it pays to keep a sideways glance at your other options. Let's consider Chorus, another telecommunications (albeit as a wholesale network provider rather than a retailer) play also known more for its yield than its capital growth prospects. The two most recent dividends that Chorus has paid are 26.5cps and 19cps, but these are unimputed. At yesterday's closing price of $7.32 that means investors are sitting on an historical gross yield of:

(26.5c+19c)/732c = 6.2%

Now look at Spark that has paid fully imputed dividends of 13.5c and 13.5c fully imputed over the past year and closed yesterday at $4.10.

This gives a gross yield of: [(13.5c + 13.5c)/0.72] / 410c = 9.1%

Yes I do know that Spark has been paying out more than their earnings in dividends. So it may be that dividends do reduce in the future, even if Spark in their latest profit downgrade guidance specifically stated that this would not happen. Still I think it is best to be a little conservative with our assumptions. This is why when I do a capitalised dividend valuation, I average the dividends out over a five year period. I don't just look at the immediate prior year. My calculations using this method are here:
https://www.sharetrader.co.nz/showthread.php?9630-SPK-Spark-NZ-(TELCO)&p=1047369&viewfull=1#post1047369

This means I would use a gross dividend rate of 35.07c and not 37.5c

This gives a gross yield of: 35.07/410 = 8.6%

Filthy talks about waiting for the share price to drift to $3.81. That would imply a averaged five year yield of: 35.07c/381c= 9.2%

9.1%?, 8.6%?, 9.2%?

Try looking at this in another way.

-------------------------

Let's say a good job came up with a company called Spark you thought was good to work for with a negotiable salary. A mate of yours had recently accepted a similar position at the same company on a salary of $86,000. But the job market is always moving and your skills are in high demand. There were hints that you might be offered a $91,000 package. But with that market moving a bit more maybe you should hang out for $92,000? You procrastinate, wondering what you should do.

Suddenly a bus load of immigrants arrives in town with the same qualifications and experience that you have. Overnight all of those jobs at Spark are filled and job offers at anywhere near that price are taken off the table. Dejected you walk across the street to accept a job offer at Chorus: salary $62,000.

---------------------------

The point of this job parable is that those following the squiggly line, worried about whether they can get a better payout than the next guy are so intent on following the squiggly line that when the 'income offer' of the decade sits in front of them in plain sight, they cannot see it. They haven't realised that the offer in front of them 'beats the market' by several percentage points. They are so intent on optimising their return that they let the return offer of the decade slip though their fingers. What I am saying here is that with Spark at $4.10 or $4.50 or $4.80, every purchaser is a winner. To give up such a yield opportunity because 'someone else might get a better deal' is IMO madness. When Mr Market puts an offer like this in front of you, and the Spark cupboard in your portfolio is bare, seize the opportunity (or at least partially seize it. - there is no need to buy all of your target stake in one hit) and buy the bargain that is in front of you. Or alternatively wait to buy something else with a yield 50% lower.

I am amazed at those who claim the NZX is stuffed and it is best to invest overseas are totally blind to a market offer like this which has been 'on sale' for a month or so now. So plenty of time to act. Sheesh, wake up people!

SNOOPY

[ValueNZ]

SNOOPY, if you're chasing dividend yield something like NYSE: BTI could be solid.

[Snoopy]

SNOOPY, if you're chasing dividend yield something like NYSE: BTI could be solid.


British American Tobacco? I think most people have ethical lines below which they would never invest. I think BTI is below mine. But crikey, a yield of 9.57%! I can see the temptation for others. If I bought that, I might even be able to afford to start smoking myself!

SNOOPY

[Entrep]

Hi SNOOPY, doesn't your analysis make investing in SPK more like investing in a bond?

[Snoopy]

Hi SNOOPY, doesn't your analysis make investing in SPK more like investing in a bond?

Yes I do think of Spark shares as kind of like a bond, mainly because I don't own any bonds! But show me a mainstream bond that is not in distress (not talking about Synlait SML010 here) that is paying a coupon rate of 9%? And with a potential capital gain upside to boot? If you can find one, I will happily diversify into that. Otherwise I am very happy with my Spark shares.

SNOOPY

[ValueNZ]

British American Tobacco? I think most people have ethical lines below which they would never invest. I think BTI is below mine. But crikey, a yield of 9.57%! I can see the temptation for others. If I bought that, I might even be able to afford to start smoking myself!

SNOOPY
There are two aspects to this.

One is that by purchasing shares on the secondary market, there is no impact to the companies financials whatsoever. This is a transaction between a buyer and seller, so by buying shares your capital doesn't go to BTI, it goes to whoever sold you the shares. Therefore, your investment into BTI would no impact on the number of cigarettes/vape products consumed at all. It's hard to call to that transaction immoral.

Secondly, it's questionable to whether any individual tobacco companies are acting immorally since that market would exist with or without them. We live in a free country (ha) where you're free to consume certain unhealthy products. I doubt very many people would say that an investment in Coca Cola is immoral because of the consequences to your body from drinking the stuff. People understand Coke is bad for you but consume it anyway because it brings them happiness. Same goes for cigarettes in my opinion.

Disclaimer: I hold no shares in any tobacco companies.

[Entrep]

Yes I do think of Spark shares as kind of like a bond, mainly because I don't own any bonds! But show me a mainstream bond that is not in distress (not talking about Synlait SML010 here) that is paying a coupon rate of 9%? And with a potential capital gain upside to boot? If you can find one, I will happily diversify into that. Otherwise I am very happy with my Spark shares.

SNOOPY

Thanks, yes there is the upside with the downside protection (hopefully) of the yield. Makes sense

[Snoopy]

Spark Health' is a grouping for customer service reasons, but for reporting purposes is distributed across many reporting segments. So there are no 'Spark Health profit figures' per se.
My assumption here was subsequently confirmed in HYR2024 on p9:
"Health results are included across a range of product categories."


Interesting little tidbit storylet about 'Spark Health' promoting AI via the 'Nabla Co-pilot' to our general practice and specialist doctors.
http://www.spark.co.nz/online/large-business-govt/why-choose-spark/why-spark/one-tech-generation/case-studies/transforming-healthcare

How does Nabla AI work?
Nabla captures the audio from your microphone and transcribes it live using a HIPAA-compliant speech-to-text system. Nabla then generates a note from this transcript using a combination of in-house natural language algorithms and Large Language Model (LLMs).

Nabla appears to be private equity funded US start up, which after the early 2024 funding round had a projected market value of $180m. Nabla's AI started to be developed on ChatGPT, but has now shifted to open source LLMs. For customers, Nabla Co-pilot has a single plan: Pro at $US119.00 per month.

Freeing up medical professional from spending so much time on writing case notes sounds like a really good idea. It sounds good for Nabla, having Spark promoting them. But I am not sure how Spark itself makes money from this. Anyone care to speculate? Perhaps the Nabla AI is installed in one of Spark's datacentres?

SNOOPY

[kiwikeith]

There are two aspects to this.

One is that by purchasing shares on the secondary market, there is no impact to the companies financials whatsoever. This is a transaction between a buyer and seller, so by buying shares your capital doesn't go to BTI, it goes to whoever sold you the shares. Therefore, your investment into BTI would no impact on the number of cigarettes/vape products consumed at all. It's hard to call to that transaction immoral.

Disclaimer: I hold no shares in any tobacco companies.

That may be true but banking dividend cheques paid for by addicticted customers slowly catching lung cancer from your company's product could be considered immoral.

[see weed]

That may be true but banking dividend cheques paid for by addicticted customers slowly catching lung cancer from your company's product could be considered immoral.
Is SPK connected to a tobacco company?

[kiwikeith]

Is SPK connected to a tobacco company?

If you follow the thread above the connection is SPK pays a good dividend and if you are chasing a good dividend then maybe have a look at a tobacco company.

When mobile phones were first introduced, there were several sceptics suggesting that mobile phone companies were the 1980s equivalent of tobacco companies of the 1950s. They suggested that the radio waves from mobile phones were going to lead to neurological problems and/or male sterility problems down the track. The phone companies generally replied "not proven" (rather than a definitive not so.)

[see weed]

If you follow the thread above the connection is SPK pays a good dividend and if you are chasing a good dividend then maybe have a look at a tobacco company.

When mobile phones were first introduced, there were several sceptics suggesting that mobile phone companies were the 1980s equivalent of tobacco companies of the 1950s. They suggested that the radio waves from mobile phones were going to lead to neurological problems and/or male sterility problems down the track. The phone companies generally replied "not proven" (rather than a definitive not so.)
Thanks and sorry, I must be half asleep today and realized after posting and reading further back about the div. and yld. comparisons with BTH and SPK. Google... "Mobile phone and pop corn on the Ellen show" That is a good experiment on cell phone signals.

[Snoopy]

Spark has a long history dating back to the Telecom New Zealand days. But the demerger of the landline and fixed fibre business Chorus, saw a 'new Telecom', which by the time AR2014 came out was renamed Spark. Spark came out fighting as a retailer into the new competitive market place, with Vodafone (now One New Zealand) and 2 degrees as significant other players. That means FY2014 is a reasonable 'base reference year' from which to assess the 'new Spark', shed of the old Telecom baggage.

I have been a Spark shareholder all of that time. Each year I note down the share price on 30th September. That is typically about six weeks after the annual result is released to the market. That is enough time for analysts to digest the results and get recommendations out to their clients. Thus by that date, Mr Market has had a good chance to assess fair value of Spark shares.

Spark has never been a 'get rich quick' share. But it has always been a reliable dividend payer, and I use the metric of 'historic gross dividend yield' as my measuring stick. So I ask the question, "When has been the best time to buy Spark?" in that context. What does the data say?



Year
Dividends as DeclaredGross Dividends
Gross Dividend Total
Share Price 30-09-20xx
Gross Dividend Yield


FY20148.0c+8.0c11.11c + 11.11c
22.22c
$2.97
7.48%


FY20159.0c+9.0c12.50c + 12.50c25.00c$2.987.48%


FY201611.0c+12.5c15.28c + 17.25c32.53c$3.619.01%


FY201712.5c+12.5c17.36c + 17.25c34.61c$3.659.48%


FY201812.5c + 12.5c17.22c + 16.15c33.37c$4.058.24%


FY201912.5c + 12.5c16.15c +16.15c32.30c$4.417.32%


FY202012.5c + 12.5c16.15c + 16.15c32.30c$4.706.87%


FY202112.5c + 12.5c17.36c + 17.36c34.72c$4.787.26%


FY202212.5c + 12.5c17.36c + 17.36c34.72c$5.006.94%


FY202312.5c + 13.5c17.36c + 18.75c36.11c$4.817.51%


FY202413.5c + 13.5c18.75c + 18.75c37.50c$4.06 (2)9.24%



Notes

1/ Some samples of how the gross dividend calculations were made in the above table follow:

Gross Dividend Calculations

FY2017 P2:12
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 80.6% imputed):
= 11.0c (FI) + 1.209c (FI) + 0.291c (NI) = 11.0c/0.72 + 1.209c/0.72 +0.291c = 17.25c (gross dividend)

FY2018 P1:
11.0c (Ordinary, 100% imputed) + 1.5c (Special, 75% imputed):
= 11.0c (FI) + 1.125c (FI) + 0.375c (NI) = 11.0c/0.72 + 1.125c/0.72 + 0.375c = 17.22c (gross dividend)

FY2018 P2, FY2019 P1, FY2019 P2, and FY2020 P1 (All 75% imputed): 11.0c (ordinary) + 1.5c (ordinary) = 12.5c (total)
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2020 P2:
12.5c (Ordinary, 75% imputed) = 9.375c (FI) + 3.125c (NI) = 9.375c/0.72 +3.125c = 13.021c +3.125c = 16.15c (gross dividend)

FY2021 P1, FY2021 P2, FY2022 P1:
12.5c (Ordinary, 100% imputed) = 12.5c (FI) = 12.5c/0.72 = 17.36c = 17.36c (gross dividend)

2/ 30th September 2024 is still in the future as I write this post. Therefore I have used my 11th June trading price of $4.06


------------------------------


The answer was 2017. But 2024 'right now' is not far away. I think 'right now' is an amazing portfolio building opportunity, the sort of opportunity that only comes along once in every ten years or so. If you are an income investor and don't have Spark in your portfolio now is the time to invest. I have been underweight a bit for a while myself and have been waiting for an opportunity such as this to 'load up'.
So today I pushed the buy button, buying the third tranche of my catch up purchase at $4.06. This goes with the other parcel I bought last month at $4.36 and the third parcel a month before that at $4.68. The parcels were not equal in size. So the average price I have ended up paying was $4.33 per share. I am not too worried about not buying at the absolute bottom though. IMO SPK is currently a massive bargain with a significantly better yield than anything else in the NZX50. It doesn't pay to sweat the cents, and my splitting of my order into three parcels in three consecutive months was part of the 'dollar cost averaging' buy point game that I was playing.

I just feel so lucky to be alive at such a time an incredible bargain such as this is available and to have the cash available to take advantage of it. Actually having the cash available wasn't lucky. That bit was planned

SNOOPY

[kiwikeith]

Great post Snoopy. I am surprised how well Spk has done over the last 10 years. The share price is actually above where it was 10 years ago. The same cannot be said of Telstra (Australia), BT (UK), Vodafone (UK, At&T (USA) or Telefonica (Spain).

[Snoopy]

Great post Snoopy. I am surprised how well Spk has done over the last 10 years. The share price is actually above where it was 10 years ago. The same cannot be said of Telstra (Australia), BT (UK), Vodafone (UK, At&T (USA) or Telefonica (Spain).


Yes, it was a bold move to rebrand as Spark all those years ago. I remember the arrogance of those latter TG years, where Theresa seemed convinced that 'Telecom' would keep the fixed line network and behave as an ahem, 'responsible wholesaler' as she played the 'confusion' card of creating multiple user plans so no-one was ever sure they were on the best plan - for them. She was absolutely dumbstruck when the government decreed that 'Chorus' would be carved out!

After a few years away, with Telecom under the stewardship of the English giant, Paul Reynolds, Simon Moutter made a triumphant return, this time to the top job. I remember being a bit cynical about the Spark rebrand at the time. But it certainly gave the company a fresh start. Looking back I see it was actually under Reynolds that the then Telecom launched its 'Skinny' budget brand in 2012. But it certainly blossomed under Moutter. Even today, Spark is the only NZ company with its own 'budget brand'. (One NZ's budget offering 'Kogan' is actually owned by TPG Group, formerly Vodafone Australia). By brandname, Spark are the largest MVNO (Mobile Virtual Network Operator) in NZ as well with Vocus, Trustpower, and Compass all on the Spark network. And it must be said. With Chorus offering the same fixed line deals to every operator, mobile has become the differentiator between the telecommunications retailers, as far as retail customers are concerned.

Talking with a 16 year old relative, I was surprised to find he didn't realise Spark was a New Zealand company! He thought it was some hip international brand, which just goes to show how far Spark have come from their old fuddy duddy Telecom image.

Whether by good luck or good design, Spark have unloaded assets at the right time. Yellow and White Pages, was previously sold by Telecom to a private equity consortium for $2.2 billion in 2007. In April 2023 this troubled business was on sold for just $NZ14.3m! In FY2023 Spark sold down their stake in the cell tower site business for $900m. Whether this move will be as well timed as the Yellow pages deal remains to be seen. But it has certainly done wonders for Spark cashflow.

Like any share investment, we have to remember there are execution risks.

a/ 'Spark Sport' seems to have been an own goal, which was fortunate enough to be patched over in the accounts by the simultaneous successful cell tower sell down.

b/ Spark are being bold in taking a first mover initiative in the data centre market. In theory, they might have difficulty rolling over those contracts once the international hyperscalers like AWS and Microsoft Azure establish themselves on shore. But Spark are signing up their customers on ten year contracts, so they have a long runway to adapt. And who knows, some future government may demand that the personal data of New Zealanders must only be held on shore by NZ owned companies?

Spark have gone down this NZ ownership path before. I think they are only NZ mass market telecommunications service provider offering an NZ managed e-mail system to their clients? (Xtra mail). And they have now monetised this difference. Competitors now force e-mail users onto 'free' ('free' actually means you are a money generating centre to be on sold) international providers, such as Google.

c/ Spark seem to have boosted their dividend yield by 'paying out more than they earn', and 'in fully imputed dividends' to boot! Long term, this is not sustainable, and it seems to have been patched over for now by the cell tower sell down windfall. But management seem confident they are on track to grow their income stream to match the current dividend rate. And who am I to bet against them?

Simon Moutter departed his CEO role some years ago, and has since been replaced by the equally proficient Jolie Hodson, who is at the top of her game in the CEO class in my books..

The key to mitigating any investment risks as an investor is to always 'buy at a discount'. In my case, I am 'happy' to accept buying into a utility provider that provides resilience in turbulent business times at a gross yield of 6.5%. By because I like to 'buy at a discount', I look for a gross yield of at least 7.5% which I think of as a 'good deal'. Recent market behaviour which has seen the gross yield at Spark blow out to more than 9% has left me stunned. All I can say is "Thank you Mr Market!" as my share vacuum cleaner comes out.

SNOOPY

[Entrep]

Thanks Snoopy

[see weed]

Yeah thanks and good post Snoopy. Have been thinking along similar lines also buying in a bit over 30 parcels of SPKs in last couple months. A bit scary breaking all investment rules lol.

[Jaa]

Whether by good luck or good design, Spark have unloaded assets at the right time. Yellow and White Pages, was previously sold by Telecom to a private equity consortium for $2.2 billion in 2007. In April 2023 this troubled business was on sold for just $NZ14.3m! In FY2023 Spark sold down their stake in the cell tower site business for $900m. Whether this move will be as well timed as the Yellow pages deal remains to be seen. But it has certainly done wonders for Spark cashflow.


b/ Spark are being bold in taking a first mover initiative in the data centre market. In theory, they might have difficulty rolling over those contracts once the international hyperscalers like AWS and Microsoft Azure establish themselves on shore. But Spark are signing up their customers on ten year contracts, so they have a long runway to adapt. And who knows, some future government may demand that the personal data of New Zealanders must only be held on shore by NZ owned companies?

Great post Snoopy. Meridian and Spark have both had this trick of building up valuable, saleable assets that boost the companies and share prices outside of their day to day operations. Speaks well to their capital investment decisions and perhaps the latent value inherent in well run utility companies.

My bet is the data centre division is spun out next. Lots of hype and froth in the data centre market both in NZ and internationally.

[kiwikeith]

Snoopy. I have followed your suggestion and picked up 5,000 shares at $4.03 this afternoon. I will see how it goes but I have loads of patience and can hold shares for the rest of my lifetime. I often notice shares hover around round dollar amounts and dont like to break through it for long. So I am hoping $4 flat is a support level.

[Snoopy]

Great post Snoopy. Meridian and Spark have both had this trick of building up valuable, saleable assets that boost the companies and share prices outside of their day to day operations. Speaks well to their capital investment decisions and perhaps the latent value inherent in well run utility companies.

My bet is the data centre division is spun out next. Lots of hype and froth in the data centre market both in NZ and internationally.


You could be right Jaa. I don't see Spark getting out of the data centre market. But as with the cell towers, Spark only need to own the operating electronics. Not the civil structures built to house them.

The interesting thing is that the 'differentiating' factor that Spark have to offer in data centres is the 'hybrid cloud' or 'private cloud'. The 'hybrid cloud' allows customers to install their own electronic memory devices on the Spark data racks, while similarly retaining access to the public racks owned by Spark for storing less sensitive data. Then we have the full private cloud, which allows customers to put all of their 'cloud; storage on their own in house company owned hard drives etc. So you have the potential for all sorts of third party people/technicians tramping through the Spark data centre.

The nearest analogous thing I can think of is a family owning their own flat, but then selling it to a third party landlord and leasing it back. The family know exactly who they are OK with crossing the threshold. But they now have to tell the new landlord that yes Aunty Flo comes in on Tuesday and Thursday to mind the baby. But what the landlord doesn't know is that sometimes Flo brings along her 'professional Crocodile Wrestling' boyfriend Matterhorn, complete with his croc. Then the croc slinks off and lays some eggs in older daughter Jen's bed. A month later Jen wakes up screaming as baby crocs just hatched start nibbling at her toes. Jen's father blames the landlord for letting Matterhorn and his croc companion in. But the landlord was only told that Aunty Flo should have full discretion to visit. And full discretion means bringing in any 'handyman/tech person' she sees fit. So who is to blame for this mess? It puts the third party landlord in a tricky position.

Now let's look at an alternative scenario where 'the family' are actually crims serving a year of home detention. In this case no person is allowed in or out. So all our 'landlord' has to do is put a sentry on the front door with authority such that if anyone 'crosses that front door threshold', be they be going in or out, there is one simple instruction: "Shoot to kill." This way, everyone knows exactly where they stand and there is no possibility of third parties coming in and putting animal matter (or data devices) in other people's bedrooms. The "shoot to kill" operation is the much easier scenario to manage, and is the kind of 'tenancy' that the likes of AWS and Microsoft Azure might offer to their 'public' data customers, or the style of tenancy that a third party landlord might find easy to manage for that matter.

The point I am making here is that while 'public' databases centres might be straightforward to sell, perhaps 'private' and 'hybrid' database centres, which Spark see as their competitive point of difference, may be less easy to offload.

SNOOPY

[Snoopy]

Snoopy. I have followed your suggestion and picked up 5,000 shares at $4.03 this afternoon. I will see how it goes but I have loads of patience and can hold shares for the rest of my lifetime. I often notice shares hover around round dollar amounts and dont like to break through it for long. So I am hoping $4 flat is a support level.


I suspect you will not 'get rick quick' kiwikeith. But nevertheless in the medium term, I expect you will do very well.

Part of the problem I have with my own portfolio is that those shares I hold in the NZX20, I tend to have 'underweight' positions in. Why? Because I like to buy my shares at some sort of discount. And when you have a share that is as well researched and has its esearch shared as an NZX20 share does, that 'discount to fair value' just doesn't happen very often. So when the opportunity arises, I feel the need act. I know some people like to optimise their entry points using charting techniques. Of course, this always involves 'missing the bottom' because an uptrend will never be confirmed until 'the bottom' is history. But:

1/ If you are buying for 'historical yield', which at today's closing price of 402.5 means a gross yield of: 37.5/402.5= 9.32%

OR 2/ You are looking for that 'short dip' below the $4 threshold to 392.5 (a gross yield of 37.5/392.5= 9.43%)'

OR 3/ You buy when the train is on the way up by 10c (a gross yield of 37.5c/412.5= 9.09%)

,,,,does it really matter, which option you choose?. All purchases are a great yields. Why worry about fractional perturbations in returns, when, looking at the bigger picture, all of those returns are a cut above anything you can get from a blue chip utility anywhere else? My mentality with Spark now is that 'Missing Out' on these prices is actually your biggest investment risk.

I know that interest rates will reduce at some point. I know that Spark is an interest rate driven share. I know the Spark share price will very likely jump when that happens. But I don't know when interest rates will move. And I am not prepared to sit over a computer screen 24/7 to 'push the buy button' on the moment. So best to be in! And if I have to wait six months. I will be paid a handsome dividend yield for my waiting time!

SNOOPY

[Jaa]

You could be right Jaa. I don't see Spark getting out of the data centre market. But as with the cell towers, Spark only need to own the operating electronics. Not the civil structures built to house them.

The interesting thing is that the 'differentiating' factor that Spark have to offer in data centres is the 'hybrid cloud' or 'private cloud'. The 'hybrid cloud' allows customers to install their own electronic memory devices on the Spark data racks, while similarly retaining access to the public racks owned by Spark for storing less sensitive data. Then we have the full private cloud, which allows customers to put all of their 'cloud; storage on their own in house company owned hard drives etc. So you have the potential for all sorts of third party people/technicians tramping through the Spark data centre.

This is called colocation and has been common in data centes for decades.

Most shared data centres do indeed have all sorts of third party people walking through them, especially after any kind of power failure as random switches, servers and routers fail on restart. Not unusual for companies with colocated whole racks to cover or obscure them so their competitors can't see what hardware they are using. The really high end ones provide escorts so technicians don't get "lost".

[see weed]

SPK now under $4.

[bull....]

SPK now under $4.

yes new lows coming :scared:

[see weed]

yes new lows coming :scared:
I can't help but smile. Even though am down thousands. This reminds me of the Macpac add on tv. We are now teetering on the $4 cliff....... " Have you still got your Land line...no....well this is a bit precarious quite precarious in fact....if this was a film shareholders would start to worry at this point.....yeah but this is a Sparkpac.... ahhh Sparkpac that is incredible, what do they have a bungee cord for soft landing. Shhh someone is coming:D

[bull....]

I can't help but smile. Even though am down thousands. This reminds me of the Macpac add on tv. We are now teetering on the $4 cliff....... " Have you still got your Land line...no....well this is a bit precarious quite precarious in fact....if this was a film shareholders would start to worry at this point.....yeah but this is a Sparkpac.... ahhh Sparkpac that is incredible, what do they have a bungee cord for soft landing. Shhh someone is coming:D

new lows coming :scared:

i read somewhere amazon prime was looking into offering cheap mobile to prime customers. might happen or might not guess they would need a carrier to do the deal.

[nztx]

new lows coming :scared:

i read somewhere amazon prime was looking into offering cheap mobile to prime customers. might happen or might not guess they would need a carrier to do the deal.


Did someone say that another Telco needed a Cap Raise to cover new demand ? :)

[bull....]

spark increasing broadband pricing has not helped the stock price :scared: new low today in current down trend

[Valuegrowth]

SPK now under $4. I doubt it will go under a dollar like some other stocks.

[Snoopy]

spark increasing broadband pricing has not helped the stock price :scared: new low today in current down trend


What you haven't realised is that it is likely Chorus increasing broadband pricing, with Spark merely passing the price rise on. All other retail players in the broadband market will be facing the same broadband cost pressures. So I don't think this is a competitive mis-step by Spark.

SNOOPY

[kiwikeith]

What you haven't realised is that it is likely Chorus increasing broadband pricing, with Spark merely passing the price rise on. All other retail players in the broadband market will be facing the same broadband cost pressures. So I don't think this is a competitive mis-step by Spark.

SNOOPY

Yes and 31% of Spark's broadband customers are using wireless broadband which does not incur the chorus charge. I do wonder if the market is taking account of Spark's data centre potential. The development pipeline could increase total capacity from 22MW to 93 MW.